The oil shock is hitting the economy

Should we start with the bad news, or the other bad news?

We’re finally getting a fuller picture of how the broader economy is faring amid the war with Iran, AI fears, and a slowing labor market…and it’s not a pretty one.

Today, the Organization for Economic Coordination and Development said in its latest outlook that not only is the war with Iran kneecapping global economic growth, it’s also reviving inflation. The OECD upped its forecast for the average headline inflation rate of the G20 economies in 2026 to 4%, higher than its prior projection of 2.8% back in December. The US-specific forecast was even bleaker: Domestic headline inflation will reach 4.2% this year, up 1.2% from the last forecast.

While the organization’s projected global growth rate for 2026 is still 2.9%, the same as its December projection, it’s a slowdown from the 3.3% growth rate in 2025. The OECD also predicted US economic growth will slow to 1.7% in 2027, down from the 1.9% it forecast in December.

“The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth,” the Paris-based organization said in the report. However, it also expects most of the inflationary pressure to recede by the end of 2027.

It’s probably no coincidence that, at the same time, major Wall Street banks are recalibrating their recession odds:

• Goldman Sachs just raised its recession probability within the next year to 30%
• Meanwhile, EY Parthenon upped its odds to 40%
• Wilmington Trust says there’s a 45% chance
• Moody’s Analytics raised its own outlook to 48.6%

“The magnitude and duration of flow disruptions through the Strait of Hormuz and the risk of growing damage to oil production, refining capacity, LNG fields, and liquefaction infrastructure suggest a more persistent inflationary impulse, extending beyond a short-lived energy price spike,” explained EY-Parthenon Chief Economist Gregory Daco in a note.

Retailers may tack on a few bucks

Big banks and economists aren’t the only ones rethinking their approach.

Retailers like H&M are considering increasing their prices if the Iran war continues to be protracted. British retailer Next blamed more expensive transportation due to the oil shock, arguing that higher freight and energy prices will cost the company about $20 million in the near term, which may eventually be passed on to consumers.

Time to get your summer wardrobe together ASAP.—LB