Commodity shock raises fears of stagflation, but a replay of the 1970s is not seen

  • Rising commodity prices will put pressure on global economic growth, the Bank for International Settlements said.
  • By some measures, the current situation looks even more disruptive than that of the 1970s, notes a BIS report.
  • But a repeat of the stagflation of the 1970s, with little or no growth and high inflation, is unlikely, the BIS said.

Soaring commodity prices are sending shockwaves through the global economy, but a repeat of 1970s-style stagflation is unlikely, the Bank for International Settlements has said.

To be sure, spikes in oil, natural gas, food and metals prices are all poised to aggravate already high inflation, the BIS said in a report on Wednesday. And additional sanctions against Russia for its war on Ukraine could further fuel inflation.

“By some measures, recent events appear even more disruptive than those of the 1970s,” the report said. “For example, recent price increases have affected a broader set of commodities. Commodity price increases in the 1970s were concentrated in oil markets, while in recent months energy prices , agriculture, materials and metals all posted strong gains.”

While oil rose further during the 1970s, global growth is still under threat today, as losses suffered by commodity importers will more than offset gains by exporters, the report warns.

The BIS report comes as top economists are increasingly sounding the alarm over stagflation. On Wednesday, Mohamed El-Erian told Bloomberg TV that the US economy has the potential to dodge a


but stagflation is inevitable.

And on Thursday, Stephen Roach told CNBC that stagflation was his base-case scenario for the US economy, as the Federal Reserve has massive tightening to do if it wants to get inflation under control.

But the outlook is not all bleak. According to the BIS report, the current commodity shock may not be as severe as that of the 1970s. For example, the current “inflationary backdrop” is less severe. Unlike the 1970s, today’s global inflation spurt was preceded by several years of low price pressure.

In addition, savings are now less energy intensive. The BIS has estimated that the amount of energy consumed relative to GDP has fallen by around 40% since the late 1970s. Finally, central banks are better equipped to respond to crises than in the 1970s, which saw the collapse of the Bretton Woods monetary system.

For these reasons, the BIS has said a repeat of this decade’s stagflation is unlikely. But high commodity prices will always be disruptive and central banks risk losing credibility if they let inflation stay high for too long, the BIS added.

“This emphasizes getting inflation back to low quickly, before it becomes entrenched in household and business decisions,” the report concludes.

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