An alarming inflationary echo from the 1970s may be resonating in current economic indicators, suggesting a potential shift toward stagflation. This perspective, put forth by Peter Corey, chief market strategist at Pave Finance, centers on the behavior of the U.S. Personal Consumption Expenditures (PCE) price index. While not an exact replica, the patterns observed in the core PCE, which excludes volatile food and energy prices, bear striking resemblances to the pre-inflationary period of the early 1970s. This historical parallel raises significant concerns for investors and policymakers alike, particularly in the context of a weakened labor market and ongoing economic uncertainties.
The core PCE index has stabilized around the 3% mark, a level that deviates from the Federal Reserve’s 2% inflation target. Corey posits that this plateau mirrors the economic conditions preceding the significant inflationary surge experienced between 1972 and 1974. During that era, inflation, after an initial decline, re-accelerated sharply, exacerbated by factors such as the 1973 oil embargo and the termination of wage and price controls implemented by President Richard Nixon. The subsequent impact on financial markets was severe, with the Nasdaq Composite experiencing substantial declines in 1973 and 1974.
While acknowledging the differences between the two economic periods, Corey maintains that the risk of a resurgent inflation cannot be ignored. A key driver of inflation in the 1970s was a dramatic increase in oil prices. Currently, however, crude oil prices may face downward pressure due to increased supply from OPEC+ members. Despite this divergence, Corey suggests that current inflationary pressures could still escalate. He points to potential threats to the Federal Reserve’s independence, which might lead to premature interest rate cuts just as inflationary forces begin to re-emerge. Near-term data indicates a softening labor market and moderately elevated inflation, though these have not yet caused significant market turmoil.
Beyond historical parallels, emerging economic factors present new inflationary challenges. The price of electricity, in particular, is a growing concern. Driven by increased demand from artificial intelligence data centers and an aging transmission infrastructure, electricity prices have outpaced general inflation since 2022 and are projected to continue this trend at least through 2026. Compounding these economic considerations is the immediate impact of the U.S. government shutdown. Initiated on October 1st, the shutdown has curtailed the release of crucial economic data, leaving financial markets without vital information. This disruption has already delayed key employment reports and is expected to impact the publication of producer and consumer price indices, as reported by the Bureau of Labor Statistics (BLS).
Corey’s overarching concern is the potential for a renewed inflationary cycle to negatively impact consumer sentiment. Persistent price pressures, coupled with a potential economic slowdown, could lead to reduced consumer spending, which constitutes a significant portion of the U.S. Gross Domestic Product (GDP). This, in turn, could fuel further inflationary expectations, creating a self-perpetuating cycle. Consequently, Corey’s base case scenario now anticipates a transition into stagflation, characterized by weak economic growth and persistent inflation, reminiscent of the economic conditions observed in the 1970s. While the market’s immediate reaction remains to be seen, Corey believes that the economic realities of stagflation will eventually become evident.
Michael Carter holds a BA in Economics from the University of Chicago and is a CFA charterholder. With over a decade of experience at top financial publications, he specializes in equity markets, mergers & acquisitions, and macroeconomic trends, delivering clear, data-driven insights that help readers navigate complex market movements.