1970s stagflation? It’s the opposite

  • BlackRock

Prices have climbed around the world, with commodities prices surging and US inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends. There’s no risk of 1970s-style stagflation, in our view. Economic activity is increasing briskly and has room to run. We remain tactically pro-risk, but see a narrower path for risk assets to move higher as markets and policymakers could misread the price surge.

Key points

Global prices climb
The inflation pressures we expected are here – and are persistent. This is not stagflation, and we remain pro-risk. But confusion over price surges is a risk.
Market backdrop
Global equities rallied as the third-quarter corporate earnings season kicked off with strong results in the US We are focused on signs of cost pressures.
Week ahead
We’re watching the global Purchasing Managers’ Indexes this week for read-outs on manufacturing bottlenecks and the strength of the economic restart.
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Chart of the week
Global industrial production (IP) and Brent crude oil prices

Global industrial production (IP) and Brent crude oil prices

Source: BlackRock Investment Institute, with data from BEA, Netherlands Bureau for Economic Policy Analysis, Energy Information Administration. Chart year-over-year growth in global industrial production (IP) on the left and Brent crude oil prices on the right.

We have long held that inflation was one of the market’s most underappreciated risks.  Now it’s here. This year’s surge is primarily driven by a major supply shock:  the vaccine-driven restart of economic activity from the pandemic’s shutdowns. Producers have struggled to meet resurgent demand, clogged ports have increased shipping costs, and surging commodities have added to price pressures. These dynamics mark a sea change from the environment many of today’s investors know best: decades of low inflation on the back of deepening globalization and technological advances. The last time a major supply shock drove up inflation was in the 1970s, when an oil embargo by producers triggered a spike in oil prices. Today’s oil price surge naturally raises the question of whether the economy is headed for 1970s-style stagflation, a period of high inflation coupled with weak growth. We think not. In fact, the growth situation today is in many ways the 1970s turned on its head. Growth is increasing at a rapid clip, rather than stagnating, as the restart rolls on. The oil price surge is to be expected in this environment, in our view. As the chart shows, oil prices (the yellow line) have moved in line with the resurgence in economic activity (red).

Why is today’s picture different? First, the current pickup in inflation is driven by the restart, not rising energy prices. Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures. Second, growth has room to run, we believe, with global activity well below its long-run potential. Supply will eventually rise to meet demand, instead of the 1970s experience of demand going down to meet supply. Third, resurgent activity is increasing demand for oil and driving prices higher. Again, this is the exact opposite of the 1970s, when higher oil prices harmed economic activity.

We expect the restart pressures to persist well into 2022 before eventually subsiding as near-term supply-demand imbalances ease. There are factors beyond the restart that could add to this persistence: the consolidation in the resources industry, capital discipline by producers, years of underinvestment in production capacity, and perhaps the shift to more sustainable energy sources. The series of shocks provide a glimpse of what a disorderly transition to a more sustainable world could look like, with a risk of commodities volatility jumping to other asset classes – and a resulting increase of risk premia across the board. This underscores our 2021 Outlook theme the Journey to net zero.

The risk is that markets and central banks misread the current shocks, leading to fast-rising inflation expectations or premature monetary tightening. We believe central banks with credible inflation frameworks will largely look through the restart price pressures – and avoid a premature tightening that hurts growth but does nothing to address the bottlenecks. We expect this to play out differently around the world, and could see central banks that worry about their handle on inflation expectations take a more hawkish approach than others.

 The bottom line: There are persistent inflationary forces at play today. We see the restart price pressures eventually resolving themselves, and believe central banks with credible policy frameworks will look through most of them. Our New nominal investment theme keeps us moderately pro-risk on a tactical basis, even as we see a narrower path for risk assets to move higher. The inflation spike could result in inflation expectations spiraling upward, central banks tightening policy prematurely - or markets pricing in either of these outcomes before they actually happen. We are underweight government bonds as we expect yields to gradually catch up to the reality of the strong restart. On a strategic horizon, we still see a shift to a moderately higher inflation regime amid structural cost pressures and the ongoing policy revolution – the unprecedented coordination between monetary and fiscal policy. This keeps us preferring inflation-protected securities over nominal bonds.

IMF cautions on inflation risks
The International Monetary Fund shares our view on the key driver of current high inflation. Read more in our macro insights.
Eyes on inflation

Assets in review
Selected asset performance, 2021 year-to-date and range

The chart shows oil prices have moved in line with the resurgence in global economic activity.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of Oct. 15, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI USA Index , MSCI Europe Index, ICE US Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index, Refinitiv Datastream US 10-year benchmark government bond index and spot gold.

The third-quarter corporate earnings season kicked off with strong results that were boosted by the powerful restart. Overall, S&P 500 profits are set to jump 26% on revenue growth of 14%, according to consensus estimates. The top item to watch:  signs of cost pressures. We view the recent yield backup as correcting a disconnect between the restart and low yield levels, rather than foreshadowing a more drastic yield rise.

Week ahead

Oct. 18 US Industrial Production; China retail sales
Oct. 19 US housing starts
Oct. 21 US Philly Fed Business Index; Euro area Consumer Confidence Flash
Oct. 22 US, UK, euro area and Japan Markit Flash PMIs

This week, we’re watching a slew of Purchasing Managers’ Indexes (PMIs) for a read-out on manufacturing bottlenecks and to gauge the strength of the restart of economic activity. A continued restart could pave the way for further labor market normalisation, while we expect supply chain frictions to ease as global manufacturing production and trade ramp up.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, October 2021

Legend Granular

Note: Views are from a US dollar perspective, October 2021. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2021

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Read details about our investment themes and more in our 2021 Global outlook.

Growth edges up


The powerful restart of economic activity has broadened, with Europe and other major economies catching up with the US We expect a higher inflation regime in the medium term. We see the Fed normalising policy rates only in 2023 and the European Central Bank standing pat for much longer.

    • The new nominal has largely unfolded in 2021: the rise in long-term yields has been mainly driven by higher market pricing of inflation, with real yields remaining pinned well in negative territory.
    • The Fed has signalled that it is gearing up to start tapering around the end of the year. It appears reluctant to confirm its inflation mandate has been met, and this reinforces our new nominal theme.
    • The ECB has made a significant change to its monetary policy framework by adopting a symmetric inflation target of 2%. We believe this is part of a global trend to relax the constraints in earlier frameworks preventing looser policy.
    • Tactical implication: We are overweight European equities and inflation-linked bonds. We are neutral on US equities. We upgrade EM local-currency debt to modest overweight.​
    • Strategic implication: We remain underweight DM government bonds and prefer equities over credit.
Policy Pause


China is on the path toward greater role of state where social objectives will have primacy over quantity of growth. Yet the growth slowdown has hit levels policymakers can no longer ignore and we expect to see incremental loosening across three pillars - monetary, fiscal and regulatory.

    • We believe investors should be mindful of ongoing geopolitical tensions, which was underscored by the uncertainty around China’s clampdown on certain industries.
    • Tactical implication: We turn modestly positive on Chinese equities, and maintain an overweight on its debt.​
    • Strategic implication: Given the small benchmark weights and typical client allocation to Chinese assets, allocation would have to increase by multiples before they represent a bullish bet on China, and even more for government bonds.
Raising resilience


Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today.

    • The full consequences of the tectonic shift to sustainability are not yet in market prices, in our view. The path is unlikely to be a smooth one – and we see this creating opportunities across investment horizons. ​
    • Certain commodities, such as copper and lithium, will likely see increased demand from the drive to net zero. Yet we think it’s important to distinguish between near-term price drivers of some commodities – notably the economic restart – and the long-term transition that will matter to prices.
    • Climate risk is investment risk, and we also see it as a historic investment opportunity. Our long-run return assumptions now reflect the impact of climate change and use sectors as the relevant unit of investment analysis.
    • Tactical implication: We are overweight the tech sector as we believe it is better positioned for the green transition.​
    • Strategic implication: We like DM equities and the tech sector as a way to play the climate transition.​
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Alex Brazier
Deputy head – BlackRock Investment Institute
Elga Bartsch
Head of Macro Research — BlackRock Investment Institute

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Sources: Bloomberg unless otherwise specified.

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