Left Y axis: Federal Reserve Bank of St. Louis, Spot Crude Oil Price: West Texas Intermediate (WTI) [WTISPLC], retrieved from FRED, Federal Reserve Bank of St. Louis; , April 1, 2026. Right Y axis: Organization for Economic Co-operation and Development, Consumer Price Index: All items: Total: Total for G7 [G7CPALTT01GPM], retrieved from FRED, Federal Reserve Bank of St. Louis;, April 1, 2026.
- In the 1970s, two supply shocks, triggered by the OPEC embargo in 1973 and the Iranian Revolution in 1979, saw crude prices soar and consumer prices follow, giving rise to the term ‘stagflation’ in the US and other advanced economies.
- Yet subsequent research finds that much of the early-1970s inflation surge actually predated the oil spike, driven by loose fiscal and monetary policy, with higher inflation then feeding into producers’ efforts to defend real oil revenues. Oil, in other words, amplified a policy mistake rather than causing it outright.
- The 1980s brought a different lesson. Aggressive tightening by Paul Volcker drove short-term US rates towards 20%, crushed inflation expectations and helped break OPEC’s pricing power, ultimately ushering in a long period of disinflation despite episodes of oil volatility.
- The structural message from this era is that central bank credibility and the underlying demand environment determine whether an oil shock becomes a lasting inflation regime or a relative price adjustment.
As David Rolley, Portfolio Manager and Co-Head of the Global Fixed Income Team at Boston-based Loomis Sayles, remembers: “Back at the end of the 1960s and into the 1970s, we saw the breakdown of what was thought a stable international order – the collapse of the Bretton Woods system. The US failed to raise taxes to pay for the Vietnam War, leading to persistent inflation. Our partners abroad wouldn’t import that inflation, so the dollar peg was abandoned, and the US experienced a nine-year bear market for the dollar and accelerating inflation, which peaked at 13% by 1980…
“Paul Volcker’s ‘whatever it takes’ monetary regime led to 20% short US Treasury rates and double-digit long bond yields. This brought about dollar dominance, spectacular bull markets in US fixed income and equities, and a lasting lesson: policy changes – when big enough – reset asset classes and investment paradigms.”
Fast forward to 2021 and 2022 and energy again sat at the heart of a global inflation spike. An IMF cross country study concluded that the period was marked by “large energy price shocks” across fuels and geographies, with global energy prices roughly doubling relative to pre-pandemic levels1.
- The passthrough into consumer prices was significant but not unbounded: for advanced economies, a 1 percentage point increase in energy inflation added only about 0.05 – 0.07 percentage points to CPI over six quarters, broadly in line with earlier episodes.
- The paper stresses that “greater energy shocks rather than changes to energy price passthrough” were responsible for the surge, implying that structural transmission mechanisms proved more stable than many feared. More recent data shows energy still driving headline dynamics at the margin.
- In the US, for example, one 2025 CPI release saw energy prices up 3.2% in a single month, with gasoline rising over 5% and energy components contributing around 60% of that month’s headline inflation reading, even as core inflation remained subdued2.
So while the echo of the 1970s is clear in the optics, the underlying picture is different: energy shocks are large, yet the broader inflation process is more anchored by central bank reaction functions and diversified economies.
Post-Covid or post-GFC?
Fears of a repeat of 2022 in particular have translated into elevated volatility across sovereign bond markets, undermining traditional portfolio diversification and reinforcing the US dollar’s role as the dominant safe‑haven asset.
On the surface of it, the current crisis feels closer to the post-Covid energy shock than to the aftermath of the Global Financial Crisis (GFC) of 2008/09. But there’s an important difference: central banks are more inclined to ‘look through’ a temporary supply shock than to slash rates into a credit crisis.
The key for investors is to separate a headline inflation spike from a broader demand collapse, then watch closely for second-round wage and expectations effects:
- The GFC was a financial system event: credit broke, funding froze and central banks responded with emergency easing, liquidity backstops and ultimately quantitative easing.
- The current episode is being described by policymakers as a supply-driven oil and gas shock, with the BIS explicitly warning against rushing into a monetary response if the shock proves temporary.
- That makes it much more like the post-Covid period, when supply constraints, reopening demand and energy costs pushed inflation up before monetary policy caught up.
Either way, investors should understand why a market crisis invites a policy response, says Francois Collet, Portfolio Manager and CIO at Paris-based DNCA – who has firsthand experience of managing a bond portfolio through the height of the pandemic shutdowns.
He explains: “After the GFC and eurozone crisis, inflation never materialised. But after Covid, it did. So, in many respects, this time really was different. The scale of fiscal and monetary intervention was unprecedented, and it finally triggered inflation. And for bond investors, inflation is a disease worse than Covid…
“It’s crucial to recognise that in democracies, politics drives spending. Populism, fiscal expansions, and ‘gifts for all’ eventually sow the seeds for higher inflation – and possibly currency volatility. Next time, the US or another anchor market could see its own debt or currency in the crosshairs.”
That said, the post-Covid comparison for today’s oil shock is not exact either. In 2021-22, demand was also unusually strong because households had excess savings and fiscal support; today’s risk is more about a constrained supply channel that could be amplified by geopolitics and shipping disruption. If oil stays high long enough, the story shifts from a simple price shock to a broader squeeze on real incomes, confidence and margins.
Zouhoure Bousbih, Emerging Markets Strategist at Paris-based Ostrum AM, comments: “The key difference relative to 2022 lies in the nature of the shock, which is geopolitical rather than structural, suggesting a potentially transitory shock – albeit one that warrants close monitoring…
“However, a major distinction relative to 2022 remains: in 2026, the energy shock is primarily contingent on an extreme scenario – namely a prolonged blockage of the Strait of Hormuz – that would keep Brent prices around $100, rather than on an already realised supply disruption, as was the case in 2022.”
Ultimately, the longer the conflict persists and continues to disrupt energy markets, the greater the risk of lasting inflationary pressure. Lynda Schweitzer, Portfolio Manager and Co-Head of Global Fixed Income at Loomis Sayles, says: “We don’t expect energy prices and inflation to normalise in a linear fashion once the conflict resolves…
“As the conflict wages on, oil storage will fill and production will need to cease. This will delay the recovery in energy markets if or when the conflict is resolved. Any infrastructure damage from the conflict will only make restarting that much more difficult.”
How might 2026 be different?
The immediate reaction from central banks appears to be caution rather than panic. The BIS view is that supply shocks should be looked through if they are temporary, while the IMF has stressed that policymakers should remain alert to inflation expectations and second-round effects. In practical terms, that means rates are less likely to be cut quickly unless the oil shock clearly damages growth and financial conditions.
That is very different from the GFC, when the priority was to prevent a collapse in the banking system and monetary policy had to move aggressively and fast. Indeed, today’s dilemma is more awkward: if central banks ease too early, they risk validating higher inflation; if they stay tight too long, they risk deepening the growth hit from energy. The current stance is therefore a hawkish hold, not a crisis bailout.
It’s also worth noting that the US Federal Reserve (Fed) holds a unique dual mandate, quite different than the single price stability mandate that both the European Central Bank (ECB) and the Bank of Japan (BoJ) share. The Fed’s charter explicitly states that the goals for that institution focus on both prices stability as well as full employment.
Jack Janasiewicz, Portfolio Manager and Lead Portfolio Strategist for Natixis IM Solutions, says that serving two masters can create tensions when the policy response targeting one side of the mandate can exacerbate the other side – which is what we are now witnessing today.
He explains: “As the Fed begins to worry about the potential impacts to inflation as higher energy costs begin to seep into the broader economy, market expectations for the Fed to tighten policy have begun to shift. And this is happening at a time when the labour markets are softening, real wages are slowing and job ads continue to cool…
“Aggressively tightening monetary policy to keep inflation expectations in check would likely lead to a slowing in growth which would put increasing downward pressure on an already soft labour market. Addressing inflation worries likely leads to increasing risks to the labour side of the mandate. And round and round we go.”
We certainly can’t ignore the politics – namely, the US mid-term elections. Each US state holds primary elections from March to September, which determine the candidates that will be on the general election ballot in November. All of which makes a deadlock with Iran feel like an unpalatable situation for President Trump.
As Mabrouk Chetouane, Head of Global Market Strategy at Natixis IM, observes: “The Trump administration cannot afford to bear the brunt of excessively high energy inflation, given that the cost of living remains a central issue in current debates. The risks associated with a structural spread of the energy shock, similar to the combination of supply and demand shocks observed in 2022, are low…
“First, the shock is far less pronounced in terms of its impact on gas prices. The price per barrel is subject to sporadic downward pressure through the release of reserves and increased supply. Furthermore, developed economies are no longer in a post-Covid reopening phase characterised by imbalances in the supply and demand for labour, manufactured goods and services. Finally, monetary policy stances are far less accommodative than they were during 2022.”
In the short term, investors might want to think in three layers:
- Commodities: if the oil shock fades, inflation expectations can come back down fairly quickly; if it persists, headline inflation will stay sticky.
- Real economy: higher fuel and transport costs can squeeze consumers and profits, even if core inflation remains more contained.
- Policy: central banks may delay cuts, but they are unlikely to embark on a GFC-style rescue unless markets seize up.
Longer term, the more important question is whether this shock changes the inflation regime. The IMF has said that a sustained 10% rise in oil prices could add about 40 basis points to global headline inflation if it lasts through the year, while trimming output by 0.1 to 0.2%. That is meaningful, but it is not the same as the self-reinforcing inflation spiral of the 1970s.
“Bottom line, if the conflict persists, the risk is that the rise in oil prices leads to a persistent rise in inflation expectations,” says Lynda. “This could present global central banks with the dilemma of choosing an inflation response or prioritising growth. If inflation expectations remain anchored, central banks’ responses can be more measured. Unanchored inflation expectations will likely bring about stronger central bank reactions and therefore greater impacts on each country and the broader global economy.”
The historical lesson is that oil alone rarely creates a lasting inflation regime. Rather, it becomes dangerous when it collides with loose policy, de-anchored expectations or a supply-side story that keeps getting worse.
If the shock remains temporary, the 2026 episode may be remembered as a sharp but contained interruption to disinflation. If it persists, the inflation dragon may be fully roused.
