Back to the 1970s? Investors brace for a return of stagflation

Investors are increasingly pricing in the risk that a Middle East war could trigger a stagflationary shock similar to the oil disruptions about 50 years ago, when energy-supply shocks sent inflation sharply higher and weakened growth. This scenario raises upside risk to inflation, upward pressure on energy and commodity prices, downside risk to GDP and equities, and complicates central-bank policy and rate outlooks.

Analysis

Investors are increasingly pricing in the risk that a Middle East war could trigger a stagflationary shock similar to the oil disruptions about 50 years ago, when energy-supply shocks sent inflation sharply higher and weakened growth. This scenario raises upside risk to inflation, upward pressure on energy and commodity prices, downside risk to GDP and equities, and complicates central-bank policy and rate outlooks.