A Second Wave Of Inflation Is Possible. This 1970s Comparison Holds The Clues.

A Second Wave Of Inflation Is Possible. This 1970s Comparison Holds The Clues.
Paul Allison, CFA

3 months ago2 mins

Inflation might be hinting at a break, but investors aren’t ready to relax just yet. You can tell that much from lethargic stock markets and rising bond yields. But that makes sense: the chart above traces the inflation rate from 2014 to today (black line), compared to inflation from the “great-inflation decade” of the 1970s (blue line). And yup, they look scarily similar. If they stay hip to hip, a second wave – like Covid, but with inflation – could be on the horizon, just like it was back in the 70s.

The devil’s in the details. Wages, for one, seem familiar: they were rising in the 70s when trade unions cemented higher pay for workers, and today’s low supply of labor is forcing firms to make their salaries more appealing to the limited talent. And because higher wages give folk more money – and the confidence – to spend, that demand pulls up prices. And then there are costs. In the early 70s, OPEC – the group of the biggest oil-producing nations – enforced an embargo that shook the oil market. This time around, supply shortages related to Covid and war in Ukraine kept prices hoisted high.

Mind you, not everything’s a carbon copy. Back in the day, the West relied on Middle Eastern oil. But America’s just about self-sufficient these days, meaning it can loosen its own spigots to offset supply cuts elsewhere. Plus, the world’s gradually moving away from fossil fuels anyway. And with today’s supply chain wrinkles getting ironed out, we can probably stop fretting about shortages.

So sure, there’s a chance of a second wave – especially as the price of commodities could still spike and wages remain on the up. But economies and companies are more dynamic today than they were 50 years ago. They’ve battled serious problems over the last few years, and profit and stock prices have emerged near record highs. For me, that’s enough to keep me optimistic about stocks’ long-term prospects.



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