Soaring commodity prices are sending shockwaves through the global economy, but a repeat of 1970s-style stagflation is unlikely, the Bank for International Settlements said.
To be sure, price spikes in oil, natural gas, food and metals are all poised to worsen already-high inflation, BIS said in a report published on Wednesday. And additional sanctions on Russia for its war on Ukraine could further stoke inflation.
“By some measures, recent events look even more disruptive than those of the 1970s,” the report says. “For example, recent price increases have affected a broader set of commodities. Commodity price rises in the 1970s were concentrated in oil markets, whereas in recent months energy, agricultural, commodity and metals prices have all experienced strong gains.”
While oil surged more during the 1970s, global growth is still at risk today as losses suffered by commodities importers will more than offset gains by exporters, the report cautioned.
The BIS report comes as top economists increasingly sound the alarm on stagflation. On Wednesday, Mohamed El-Erian told Bloomberg TV that the US economy can potentially dodge a recession, but stagflation is unavoidable.
But the outlook isn’t all grim. According to the BIS report, today’s commodity shock may not be as bad as the 1970s. For instance, the current “inflationary backdrop” is less severe. Unlike the 1970s, today’s bout of global inflation was preceded by several years of low price pressure.
Also, economies are less energy-intensive now. BIS estimated that the amount of energy consumed relative to GDP has fallen by around 40% since the late 1970s. And 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, BIS said a repeat of that decade’s stagflation is unlikely. But high commodity prices will still be disruptive, and central banks risk losing credibility if they allow inflation to stay high for too long, BIS added.
“This puts a premium on restoring low inflation quickly, before it becomes ingrained in households and corporate decisions,” the report concluded.