The 1970s Are Calling

The word "stagflation" is back in circulation, and for anyone who lived through the 1970s, that's not a welcome headline.

Stagflation, which describes a combination of low growth and high inflation, defined the worst decade in modern market history. The Dow Jones Industrial Average rose just 0.05% over the entire 1970s. From 1968 to 1983, the Consumer Price Index soared 186.4%, rising an average of 7.3% annually.

Two oil crises drove the devastation: an OPEC embargo following the 1973 Yom Kippur War sent crude prices up 300%, and the 1979 Iranian Revolution pushed oil from under $4 a barrel to near $40 by 1980.

The cure, administered by Fed Chairman Paul Volcker, was interest rates above 20% and unemployment above 10%.

Today's setup isn't as extreme… yet.

Oil hit $100 a barrel again this week for the first time in four years, as the US-Israeli conflict with Iran puts pressure on global supply, per Barron's. Inflation has been running persistently above Fed targets. And signs of economic slowing are already in place. Stagflation's chief components are present. They just need a catalyst.

On the plus side, the US economy is far less oil-dependent than it was in 1973. Petroleum accounted for 46% of US energy consumption then; it was down to 36% in 2024, per the US Energy Information Administration. And today's cars deliver more than twice the fuel efficiency.

Still, oil remains embedded in industrial costs across the economy, and a prolonged supply disruption would take a toll.

The point isn't that the 1970s are repeating. It's that the conditions rhyme, and history's lesson on the cure was arguably worse than the disease.

Worth keeping in mind while everyone debates what the Fed does next.