Omicron Could Cause Supply Chain Crunch And Inflation To Worsen, OECD Warns

Before the US follows Europe by ordering more lockdowns as a preventative measure to stop the omicron variant from taking hold (although as many have pointed out, that horse appears to have already left the barn), the president’s economic advisers should consider this latest warning from – who else? – the OECD.

The NGO currently responsible for sheparding the most significant change in global corporate tax policy in a century is now warning that omicron could cause inflationary pressures – already at their highest level in 30 years – and the supply chain crunch that is helping to drive them higher, to intensify.

OECD’s Laurence Boone

As some two dozen countries tighten border restrictions and impose new lockdowns, the OECD fears the new variant could delay the world’s return to “normality”, and warned that monetary policy-makers must be “cautious”. The organization’s chief economist added that central banks should try and focus their policy on providing the most vaccines to the most people, something the central bank is constitutionally ill-equipped to do. Maybe they should ask Bill Gates.

The warning was issued alongside the OECD’s routine release of projections for member states’ economies, the organization believes inflationary pressures are expected to peak next year, not this year.

Source: FT

The OECD left its growth forecasts unchanged from three months ago, but it hiked its inflation projections for the G-20 substantially. Inflation forecasts for 2022 were raised from 3.9% in its September predictions to 4.4% now. The largest per-country increases were in the US and UK, where inflation forecasts for next year rose in both countries from 3.1% to 4.4%.

For better or worse, the OECD believes price pressures will be short-lived: it expects inflation in the G-20 to ease back to 3.8% in 2023. But that presumes that major central banks like the Fed will act to keep a lid on price pressures by raising interest rates more quickly than expected, if necessary.

Per the FT, OECD chief economist Laurence Boone fears omicron could add to “the already high level of uncertainty and that could be a threat to the recovery, delaying a return to normality or something even worse.” She added, for emphasis, that higher prices warranted higher interest rates and a slightly tighter monetary policy. Moreover, she added that there’s no “one-size-fits-all” monetary policy, and that emerging market and developed nations might need to go about managing their recoveries in different ways.

Finally, she stressed the need for policymakers to clearly communicate their reasons for hiking rates: They must make sure markets and their participants understand that the Fed isn’t hiking rates because of supply shortages, but in an effort to push back against broadening price pressures before they become self-reinforcing.

The takeaway: the OECD believes that the initial recovery from the pandemic had been faster than expected. But the massive injections of rescue capital by the US and other developed economies (and plenty of developing economies as well), along with the US’s refusal to share its vaccine recipes with the developing world, have created “imbalances” throughout the global economy.

So, expect the next few years to be even rockier than the last as the US and its European allies are poised to tumble into a deep recession – unless Dr. Anthony Fauci and President Biden succeed in selling omicron (or “omNicron”) to the American people as a boogeyman worthy of more lockdowns (and thus more stimulus).