How the Ukraine crisis could make the 2020s like 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whether the 1970s are an apt historical comparison in a congressional hearing this week, he said, "That's the proper historical reference for what we're trying not to replicate."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.