Vol. 01 – The Volcker shock
7
World - Oil price $ per barrel
200
Real
150
100
50
Nominal
0
1970
1980
1990
2000
2010
2020
Source: World Bank, Rothschild & Co Asset Management Europe, March 2023
of persistent high inflation, echoing the experience of the 1970s. Indeed, inflation has come back faster, spiked more markedly, and proved to be more persistent than most central banks initially thought possible. Between 1973-83, global inflation averaged more than 11% a year, almost three times as high as the average during 1962-72, when large supply shocks, accommodative policies, and a fading of structural forces that promoted growth and disinflation triggered prolonged stagflation (5) . Today, the commodity price surge in the wake of Russia’s invasion of Ukraine has exacerbated already elevated inflationary pressures driven by the pandemic’s supply disruptions, both in the goods sector and labour market. In that regard, the situation resembles the 1970’s supply oil shocks. Furthermore, then and now, monetary and fiscal policies were accommodative in the run-up to these shocks. However, the 1970s were a time of considerable structural economic rigidities, as collective bargaining covered four-fifths of employees on average OECD countries (6) . As such, general wage indexation was a powerful force in the wage-price spiral: when consumer prices rose by 1%, wages automatically rose by 1%, which increased firms’ costs in proportion to their wage bill, pushing up prices. But in the 1980’s, most countries decided to stop/ban indexation clauses as these schemes
(5) Source: World Bank, March 2023. (6) World Bank. 2022. Global Economic Prospects , June 2022. Washington, DC
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