STUBBORNLY high inflation may pose a greater risk to the American economy than a much-feared crash in house prices, the OECD said yesterday.
In a blow to hopes that US interest rates have peaked, the Organisation for Economic Co-operation and Development sounded a warning that new rate increases by the Federal Reserve may be needed to quell the persistent inflation afflicting the United States.
Still dearer borrowing costs could be needed to curb these price pressures, which spelled a greater danger to US prospects than the downturn in the country’s residential property market, the OECD argued.
Its conclusion, as it released updated global forecasts, came despite official US data yesterday showing the sharpest slowdown in American house prices in three decades. The average price of an American home rose by just 1.17 per cent in the second quarter, down from 3.65 per cent in the same period last year. This drop in house price inflation marked the biggest such fall since 1975, according to the US Office of Federal Housing Enterprise Oversight.
The figures were the latest confirmation of the dramatic cooling in the US property market. However, Jean-Philippe Cotis, chief economist at the OECD, the Paris-based club of rich economies, argued that the threat of a US house price slump was exaggerated. He noted that nothing had come of similar nightmare scenarios painted for Britain and Australia. “Maybe there’s a bit of dramatisation,” he said.
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M Cotis said that the Fed now had to walk a difficult line in tackling inflation while also ensuring that it did not tip America’s economy or its residential property market into a slump. “We’re saying: take a pause, and look at what happens,” he said. “There’s a trade-off. You don’t want to precipitate a [housing] crash, but at the same time you want to rein in inflation.”
The OECD took an upbeat view of American and world economic prospects in updated forecasts before its next full assessment in November, leaving its projection for US growth this year unchanged at 3.6 per cent. “As concerns inflation, price stability is still some way off in the US,” it said. “Further [Fed] tightening may turn out to be warranted if activity and prices do not slow down over the next few months as past interest rate hikes and housing market softening work their way through.”
The OECD abandoned its opposition earlier this year to higher eurozone interest rates. It said that these were now justified by a more bullish growth outlook. Raising its 2006 growth forecast for the eurozone to 2.7 per cent, from
2.2 per cent made in spring, it threw its weight behind further expected rate increases by the European Central Bank.