On March 10th a team of analysts led by Shawn Donnan wrote that the world economy had a good chance of avoiding a repeat of stagnant inflation in the 1970s, but not without some harm.
The historic surge in commodity prices following Russia's invasion of Ukraine, coupled with stubbornly high inflation during the epidemic, makes investors and economists wonder whether there are any parallels between the current energy shock and the long-term economic slowdown that followed 40 years ago.
Maurice Obstfeld, a former chief economist at IMF, says they are right to worry. "the longer this shock lasts," he said, the more likely the economy is to experience "a situation similar to that experienced in the 1970s."
But most economists say that, in general, this fate can be avoided.
Slower growth or even recession may be the price of overcoming inflation, and emerging economies are particularly vulnerable.
Kazuo Momma, a former head of monetary policy at the Bank of Japan, said he should be more worried about a sharp slowdown in global economic growth than runaway inflation. Part of the reason, says Mark Zandi, chief economist at Moody's Analytics), is that central banks such as the Fed have learned enough from the long-term inflation of the 1970s to avoid a "dark path" again. "they would rather push us into recession than let us into stagflation and a deeper recession," Zandi said.
Another key reason economists believe there will be no recovery in the 1970s is that workers will not be able to bargain as they did in the past.
In the US and UK, the size of trade unions has shrunk sharply. Even in Germany, where they play a bigger role, they are cautious about pushing for big pay rises. This means that a repeat of the so-called wage-price spiral, which was a key factor in inflation in the 1970s, is unlikely.
Over the past year, the legacy of the epidemic-tight supply channels, huge government spending and loose monetary policy-have triggered price rises. Europe faced an energy crisis long before the Russian invasion.
Alex Brazier, now managing director of BlackRock Investment Institute (BlackRock Investment Institute), said the "energy cost burden" of the European economy was likely to be the highest since the 1970s. Most of Europe's oil and gas comes from Russia.
The latest wave of commodity-driven price rises means it will be harder for central banks to strike a balance between persistent inflation and the risk of slowing or reversing growth. In the US, at least, investors still expect the Fed to raise interest rates six times this year, starting next week, by 25 basis points each.
Economists expect the Fed to raise interest rates by 50 basis points at some point. Isabella Weber, an economist at (University of Massachusetts Amherst) at the University of Massachusetts Amherst, says relying on the Fed to curb prices could cause unnecessary economic losses. She said there should at least be a serious dialogue about the government's control over the price of necessities.
Taken together, the world economy can avoid stagnant inflation, but it still has to face recession and the price of overcoming inflation, which is likely to boost market risk aversion and support gold prices in the medium to long term.
