Standard Chartered economists Dan Pan and Steve Englander argue that the recent rise in oil prices is unlikely to produce a 1970s-style stagflation episode in the United States. In their view, the main effect should be a one-off lift to headline inflation, with smaller knock-on effects to core inflation and GDP, while the Federal Reserve keeps policy unchanged as the labour market cools. They emphasize that US energy consumption has largely levelled off since the late 2000s, and that energy spending now represents a smaller share of household and business budgets. They also point to a softer labour market over the past two years, with wage pressures easing compared with earlier in the cycle.

Oil Shock Less Stagflationary

They add that a wider output gap than in 2022 implies more of the shock may come through as lower real wages rather than a sustained rise in inflation. Under their base case using the Fed’s FRBUS model, they estimate headline PCE inflation could reach about 3.1% in Q2. They estimate core inflation may stall near 3.0% year over year in the near term before levelling off in Q4. They also see unemployment rising slightly above 4.5%, alongside only a marginally negative effect on growth. They note that markets have removed more than 50bps of expected Fed easing for the year and now price a small chance of a rate rise. However, they argue the model implies weaker growth should offset near-term inflation risk, leaving policymakers inclined to wait for clearer evidence before moving. The recent oil price surge, in their assessment, is not shaping up to be the kind of stagflationary shock some feared. Even after Brent spiked above $110 a barrel late last year, it has since settled around $95, and the US appears more resilient with energy’s share of consumer spending closer to 4%, versus above 8% during the 1970s shocks.

Fed Seen Staying On Hold

They expect the impact to be concentrated in headline inflation with limited spillover into underlying prices. Recent data are presented as consistent with that view, with headline PCE at 2.9% year over year while core PCE held at 2.8%, alongside a softening labour market that is helping contain underlying price pressures. Against this backdrop, they see the Federal Reserve remaining on hold, similar to its stance at the most recent meeting. With aggressive rate-cut expectations being pared back but a renewed hiking cycle also looking unlikely, they infer a continued wait-and-see posture from the Fed, and suggest positioning that benefits from lower interest-rate volatility. They expect growth effects to remain mild, with unemployment drifting a bit above 4.5% later this year from around 4.3%. In their framing this is a slowdown rather than a recession, implying fears of a major downturn are likely overstated; in markets, they argue this leaves implied equity volatility looking elevated and makes selling VIX futures a potentially favourable trade in the near term. Create your live VT Markets account and start trading now.

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