Striking historical similarities! After the surge in oil prices, is the "stagflation nightmare of the 1970s" about to repeat?

Recent sharp fluctuations in oil prices have once again reminded the market of an unsettling historical reference—the stagflation era of the 1970s.

According to Wind Trading Platform, on March 9th, Deutsche Bank Research Director Jim Reid stated in a recent report that the current trend in the global energy market bears a “striking resemblance” to the macro trajectory before the second oil crisis of the 1970s.

However, Deutsche Bank emphasizes that the current economic structure has undergone a fundamental change, with much stronger inflation resistance than back then. It is unlikely to fall into the nightmare of stagflation caused by runaway inflation and the “wage-price spiral” of the 1970s. The bank said:

“Obviously, whether history repeats itself depends entirely on the duration of this conflict.”

Overlapping Time Cycles

Reid pointed out through charts in the report that the global macroeconomy seems to be repeating historical patterns.

After the first oil shock in 1973, inflation briefly declined. However, this calm lasted only 4-5 years before a more intense “second wave” hit in 1978-1979, triggered by geopolitical tensions.

In 1978, domestic political unrest in Iran intensified, oil strikes became frequent, and energy supplies began to break down. In early 1979, the Iranian Revolution erupted, with Iran producing about 7% of global oil at the time. Oil production plummeted from 5.5-6 million barrels per day to 1-1.5 million barrels. Although the net global supply loss was only about 4-5%, panic sentiment drove oil prices from $15 per barrel in 1979 to $38 per barrel in 1980, a 150% increase.

Alarmingly, this timing pattern is once again “synchronizing” today. Looking at today, it has been exactly 4-5 years since the first global inflation surge of 2021-2022.

Meanwhile, Iran again becomes a common geopolitical flashpoint in both crises.

Today’s Impact Is More Rapid

If cycle patterns are “similar in shape,” then the steepness of oil price increases is a warning beyond mere resemblance.

Deutsche Bank emphasizes that the current oil price rally has outpaced that of the 1970s. Over the past six days, oil prices surged by about 44%, with extreme peaks reaching a 65% increase.

By comparison, during the 1979 oil price spike, the most intense monthly increases were 13% in April, 12% in May, and 22% in June.

In other words, the current speed of oil price increases is significantly faster.

Although prices have now retreated to around $85 per barrel, this is no coincidence. Reid directly states:

“The most notable similarity is the sequence of shocks, with Iran being at the center of the second shock in both decades, occurring roughly 4 to 5 years after the first shock.”

This astonishing rhythmic overlap is causing market concern: Are we on the brink of a historical cycle?

Will stagflation make a comeback?

For investors worried about a replay of the “stagflation nightmare,” Deutsche Bank offers reassurance. The current macro fundamentals differ significantly from those of the 1970s.

First, inflation expectations are well-anchored. In the late 1970s, inflation expectations spiraled out of control, and the second oil shock ignited the “wage-price spiral,” forcing central banks to adopt aggressive monetary tightening. Today, despite the surge in inflation in 2022-2023, long-term inflation expectations remain remarkably stable.

Second, the economic structure has changed. Today’s economy has much lower energy intensity, and the degree of unionization and wage indexation in the labor market is far less than in the past, greatly reducing the risk of a repeat of the 1970s wage-price spiral. Additionally, before the shocks of the 1970s, inflation was already well above target, leaving less room for central bank maneuvering.

Despite the shadow of history, current financial market pricing does not seem overly pessimistic.

Markets have not fully priced in the risk of “long-term supply disruptions.” Reid mentioned that the current Brent crude futures price for 12 months remains around $75 per barrel. This reflects a widespread belief among investors that the current conflict is a “short-term geopolitical friction.”

However, no one knows what the future holds.

Deutsche Bank concludes: “Obviously, whether history repeats depends entirely on the duration of this conflict. Unfortunately, the charts from the 1970s cannot tell us the answer. But historical experience clearly suggests that once physical supply disconnection evolves into a sustained crisis, inflationary pressures will directly test each country’s monetary tightening limits.”

This insightful content is from Wind Trading Platform.

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