Runaway inflation will hamper global growth, but 1970’s-style stagflation is unlikely, given the evolution of the global economy and financial market architecture over the past 50 years, says a paper from researchers at the Bank for International Settlements (BIS).
In a bulletin, researchers from the BIS said that the current episode of inflation is broader than the oil shock that led to stagflation in the 70’s, going beyond oil prices to food and industrial commodities too.
“By some measures, recent events look even more disruptive than those of the 1970s,” it said, noting that agricultural, commodity and metals prices have all experienced strong gains in recent months.
However, the oil shock in the 1970s was much sharper than recent energy price gains, it also observed.
“In the 1973 crisis, oil prices more than doubled in the space of a week, while in the 1979 crisis they increased by a similar amount over a year. In contrast, oil prices are less than 50% above what they were at the start of 2022 and are lower in real terms than in the early 2010s,” the paper said.
Moreover, while the current climate of rising commodity prices is, “likely to weigh on global growth and add to inflation,” the paper concluded that it’s not destined to lead to stagflation.
“Lower energy dependence and stronger policy frameworks make a repeat of the 1970s stagflation unlikely,” it said.
The report noted that the energy intensity of GDP — which represents the amount of energy consumed by economic output — has fallen by about 40% since the late 1970s.
“As a result, higher energy prices matter less for growth than in the past,” it said.
Additionally, the paper said that monetary policy frameworks are more robust today than in the 1970s, when “monetary policy targets and reaction functions were ill-defined.”
These days most central banks have more coherent policy frameworks, the paper noted, which has allowed policymakers to successfully navigate previous commodity price spikes.
That said, the report also cautioned that high, volatile commodity prices “could still be disruptive.”
“Recent commodity price increases could still have significant implications for output and inflation. These, in turn, will depend on why commodity prices rose, and on whether a country exports or imports the commodities involved,” it said.
And, the credibility of monetary policy depends on the actions of the world’s central banks, which “could be eroded if central banks allow high inflation to persist for too long,” it warned.
To that end, it said that it’s essential for policymakers to work to return to low inflation quickly, “before it becomes ingrained in household and corporate decisions.”