Deutsche Bank's Warning: Is Sonic Inflation and the 1970s Stagflation Cycle Starting Again?

Findings from the latest research by Jim Reid, Research Director at the German Bank, indicate that current movements in the global energy markets carry a sonic inflation risk and show striking similarities to the macroeconomic conditions before the second oil crisis of the 1970s. These findings suggest that an economic cycle from over four decades ago may be repeating itself today.

The Legendary Oil Crisis of the 1970s and Today’s Sonic Inflation Similarities

Deutsche Bank’s analysis reveals that two economic storms share similar timing structures. Both the second oil shock of the 1970s and today’s sonic inflation trend emerged approximately 4-5 years after a period of high inflation. An interesting point is that in both cases, Iran was at the center of the economic crisis. These parallels have led Deutsche Bank’s research team to take a more serious look at whether these historical cycles might recur.

Different Times: Why Are Inflation Expectations Different?

However, there are significant differences between the current situation and the late 1970s. According to Deutsche Bank’s report, during that period, central banks completely lost control of long-term inflation expectations, which accelerated the wage-price cycle. As a result, monetary authorities had to implement tight monetary policies. Today, even in a sonic inflation environment, long-term price expectations remain extraordinarily stable. This stability has persisted even after the high inflation burst of 2022-2023, providing an advantage for central banks.

Duration of Conflict as a Determining Factor

A critical point emphasized in Deutsche Bank’s report is that the length of the energy crisis will directly influence the likelihood of a sonic inflation scenario. Prolonged conflicts increase the risk of renewed inflationary pressures and the recurrence of historical cycles. Conversely, a short-term crisis is expected to allow the system to maintain stability. This scenario analysis clearly shows that the risk of sonic inflation depends not only on current energy conditions but also heavily on the speed and severity of geopolitical developments.

(Deutsche Bank research cited from The Wall Street Journal)