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Mar 3, 2022 - Economy & Business
Axios Explains: Ukraine

How the Ukraine crisis could make the 2020s like the 1970s

Neil Irwin
A woman leaves a currency exchange office displaying the US dollar and the euro signs in Saint Petersburg on March, 2, 2022.

A woman leaves a currency exchange office in Saint Petersburg on March, 2, 2022. Photo: Olga Maltseva/AFP via Getty Images

It can be risky to draw too many historical parallels when analyzing the economy. Whatever the similarities between the current economic moment and any past episode, they're usually dwarfed by the differences.

Driving the news: Still, the surge of commodity prices that has accompanied the Russian invasion of Ukraine makes for a striking parallel between the 2020s and the 1970s.

Why it matters: The conflict in Eastern Europe risks affecting the economy in similar ways as the oil embargo of five decades ago. That implies bringing inflation down will be a slower and more painful process than policymakers have been counting on.

Flashback: Inflationary pressures were building through the late 1960s and early 1970s, fueled by high government spending and rapidly rising wages. Then in 1973, the U.S. role in the Arab-Israeli war prompted OPEC to embargo the U.S. from its oil exports. That sent oil prices skyrocketing.

  • That's the kind of price shock that central banks can't do anything about. But coming as it did at a moment of already-elevated inflationary psychology, it helped cause expectations of ever-rising prices to become more entrenched
  • Moreover, it heightened generalized discontent with the economy, the sense that things were coming unmoored beyond the details of any given piece of inflation data.

The parallels: Now, too, inflation is already high, in part due to government spending rising wages. And the war in Ukraine is causing commodity prices to soar.

  • The risk is that, as in 1973, external geopolitical events reinforce pre-existing trends in the domestic economy, while simultaneously making it politically harder for policymakers to fight inflation.

Yes, but: That's not how Fed chair Jerome Powell views it. Asked whether the 1970s are an apt historical comparison in a congressional hearing this week, he said, "That's the proper historical reference for what we're trying not to replicate." (Emphasis mine.)

  • One difference between now and then: Central bankers' conviction that it's their job to bring inflation down to an explicit target, Powell said.
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