Stagflation Risk Is Back, The 1970s Show Why It Matters

The 1970s Aren’t a Forecast, They’re a Warning

The 1970s is a useful reference point because it remains the clearest modern example of stagflation, where inflation rises as economic growth slows. For that to happen, a number of forces usually need to hit at once, pushing inflation higher while also dragging on GDP growth.

That said, history does not repeat perfectly, and past periods do not map directly into future outcomes. But the 1970s do show how severe the damage can be. It was almost a full decade of weak returns, with stocks falling around 45% from their peaks, bonds delivering deeply negative real returns, and oil and gold rising more than 1,000%.

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US dollar depegging

Importantly, the stress did not begin with the oil shock alone. In 1971, Nixon removed the US dollar’s link to gold, which fundamentally changed the global monetary system and helped export inflation across the world. That is often overlooked, but it mattered because by the time the oil embargo arrived, the system was already under pressure.

The first Oil Shock

The first major shock then came in 1973 with the Yom Kippur War, when Arab OPEC members cut off oil exports to the US and other Western nations supporting Israel. Oil prices quadrupled within months, rising from around US$3 to US$12 per barrel. What followed was one of the clearest stagflationary recessions in modern history, with inflation surging while economic growth contracted sharply.

Today, there are some similarities, but also clear differences. Crude has doubled and recently reached around US$112 as the Strait disruption intensified, but this is not yet a full oil embargo and strategic reserves are still being released. That matters because it means the scale of the supply shock, while serious, is not identical to the 1970s setup.

What happened to inflation in the 1970s

Inflation is also very different today. Back then, inflation accelerated rapidly and the Fed was under political pressure to stay too loose for too long. Today, inflation is lower, but still proving sticky, and markets remain highly sensitive to upside surprises. March inflation will matter a lot because expectations are already shifting higher.

How did the FED respond during this time?

The other major difference is the central bank response. Under Arthur Burns, the Fed was widely seen as too reluctant to attack inflation aggressively because of political pressure from Nixon and then Ford. That failure allowed inflation to become more deeply entrenched. Today, central banks appear more disciplined and more willing to keep policy tight if inflation reaccelerates.

The Iranian Revolution was the next headwind

To add more fuel to the fire, the Iranian Revolution arrived in 1979 just as markets were hoping the worst was over. The new Islamic Republic cut off Iranian oil exports, oil prices doubled again, and US CPI climbed to 14%.

At that point, inflation was running higher than the returns investors could earn across most traditional assets. That is where the 1970s shifted from a difficult decade into a genuinely traumatic one for investors.

A classic 60/40 portfolio, 60% stocks and 40% bonds, lost real value for almost a decade. There was effectively nowhere to hide except hard assets, with oil, gold, and farmland delivering the strongest returns.

The investors’ takeaway from the 1970s

We do not think the current situation leads anywhere near the extremes of the 1970s, but we could still see a period of mild stagflation risk that weighs on markets and economies for some time.

That said, there are still many known unknowns, and in this kind of environment any new shock can quickly become the next major disruption.

So for us, the 1970s are not a prediction. They are a warning. They show how damaging it can be when inflation and growth start moving in the wrong direction at the same time, especially when energy is the trigger.