Australia has been encouraged to keep transitioning to renewable energy, as the war in Ukraine exposes the risks to global energy security.
The Organisation for Economic Co-operation and Development (OECD) said the world was paying a "hefty price" for Russia's war.
It said the war is a humanitarian disaster, killing thousands of people, forcing millions from their homes, and triggering a cost-of-living crisis affecting people worldwide.
It said the conflict had also exposed how energy security and climate mitigation were intertwined, and it was urging governments to "shift gear" to accelerate the global transition to renewable energy.
It is encouraging Australia to make further investments in its transmission networks to support its renewable energy transition.
OECD says inflation will be higher and more persistent, with slower growth
The OECD released its latest Economic Outlook on Wednesday.
It slashed its forecast for global growth this year and doubled its inflation forecast, saying the world's economies had been hit by more shocks in recent months as the Ukraine war continues.
It estimated world growth would now be 3 per cent in 2022 — down from the 4.5 per cent it was projecting in December.
It forecast inflation to hit nearly 9 per cent, on average, in OECD countries this year, which is twice what it was previously projecting.
It said the inflationary pressures globally would likely be stronger and longer lasting than expected, making the world's economic recovery more complicated and fraught.
"There have been several significant changes in the global economic environment in recent months, including the worldwide spread of the Omicron variant of the SARS-COV2 virus and the greater-than-expected persistence of inflationary pressures, entailing a faster adjustment of monetary policy in a number of major economies than previously expected," the report warns.
"The single greatest change, however, is the economic impact of the war in Ukraine.
"The war in Ukraine has quashed hopes that the inflationary surge experienced in much of the global economy in 2021 and early 2022 would subside quickly.
"The additional impetus to food and energy prices, and the aggravation of supply-chain issues, imply that consumer price inflation will peak later and at higher levels than previously foreseen."
The agency said this additional negative supply shock was not anticipated, and household incomes were rising more slowly than prices globally, worsening the deterioration in real household disposable incomes that was already underway in many OECD economies.
"The forthcoming EU embargoes on coal and seaborne oil imports from Russia are likely to push up global energy prices further over the next year, keeping headline inflation higher for longer," it said.
The OECD said the war in Ukraine, when coupled with China’s zero-COVID policy, had set the global economy on a course of slower growth and rising inflation — a situation not seen since the 1970s.
"Rising inflation, largely driven by steep increases in the price of energy and food, is causing hardship for low-income people and raising serious food security risks in the world’s poorest economies," it warned.
Australia encouraged to keep transitioning to cleaner energy
Turning to Australia, the OECD said the Reserve Bank would have to keep lifting interest rates this year.
The RBA lifted the cash rate target by 0.5 percentage points this week, taking the target to 0.85 per cent — well ahead of most economists' expectations.
"Significant further monetary policy tightening is needed in order to limit the rise in inflation," the OECD said.
The economics agency also reiterated its view that Australia would benefit from an official review of its monetary policy framework.
"The review process should be transparent, involve consultation with relevant stakeholders, and should be broad in scope, potentially including a review of the central bank mandate, policy tools, methods of public communication, hiring processes and internal structures," it said.
The OECD also urged Australian governments to keep shifting towards renewable energy.
"Given the risks to energy security highlighted by the war in Ukraine, the transition towards renewable energy generation should be further encouraged, accompanied with further investments in the transmission network," it said.
It noted that the former Morrison government's temporary reduction in the fuel excise would end on September 28, sending petrol prices soaring even higher for Australian motorists.
It said if the Albanese government wanted to introduce different cost-of-living measures after September 28, the measures should be "better targeted to low-income households" and delivered in a way "that does not distort price signals".
It also said the current recovery would also be a good time to reduce Australia’s heavy reliance on taxation of personal incomes, which added to the vulnerability of public finances to an ageing population.
"Furthermore, consideration should be given to increasing or broadening the base of the Goods and Services Tax, reducing private pension tax breaks, reducing the capital gains tax discount and further replacing stamp duty with a recurrent land tax," it said.
"Such reforms would result in a more sustainable tax base."
However, Treasury secretary Steven Kennedy said on Wednesday the forecast improvement in Australia's Commonwealth budget balance (over the medium term) was relying heavily on increases in personal income tax.
"Inflation and real wages growth will result in higher average personal tax rates over time," Dr Kennedy said.
"Unless other taxes or revenues increase, there is little prospect of having sufficient fiscal space to give this back to taxpayers in the form of tax cuts.
"This would see average personal tax rates increase towards record levels, increasing the fiscal burden on wage and salary earners."
