Standard Chartered economists Dan Pan and Steve Englander argue that the recent Oil price surge is unlikely to trigger a 1970s-style stagflation in the United States. They see a one-off rise in headline inflation, limited effects on core inflation and GDP, and expect the Federal Reserve (Fed) to keep policy unchanged as the labour market softens.

Energy shock impact on US outlook

"The sharp run-up in oil prices since the start of the Middle East conflict has fuelled concerns of another widespread inflation episode, as in the wake of the Russia-Ukraine war in 2022. Growth pessimists even point to a repeat of the 1970s stagflation era. However, US energy consumption has plateaued since the late 2000s and energy expenditure now accounts for a much smaller portion of consumer and business spending."

"The labour market has softened in the last two years, with diminishing wage pressures. Macroeconomic fundamentals may suggest a less dramatic impact than previous episodes. The wider output gap now than in 2022 means that more of the energy price shock will be absorbed by lower real wages than by inflation."

"We expect a one-off increase in headline inflation, with limited impact on core inflation and growth under our base-case scenario. Using the Fed’s FRBUS model, we estimate that headline PCE could reach 3.1% in Q2. Core inflation is likely to stall around 3.0% y/y in the near term before levelling off in Q4. The unemployment rate could rise slightly above 4.5%, with a marginally negative impact on growth. While these estimates are based on our oil price forecasts, Brent futures curve prices suggest similar results."

"The market has unwound over 50bps of Fed easing priced in for the year and now sees a slight chance of hiking in response to a potential inflation spike. The FRBUS model sees the negative growth impact offsetting upside inflation risks in the near term, especially if wage and inflation expectations are well anchored."

"But risks to both sides of the Fed’s mandate may be larger than the model suggests. We expect policy makers to stay put until it becomes clearer whether the growth or inflation impacts dominate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)