On My Mind: Not partying like it’s 1979

The oil shock is here. How much of an impact will it have on the macro environment? Perspective matters. Crude oil prices breached US$100 per barrel briefly before retreating—a sharp move, but not a structural rupture on the scale of prior crises. The 1970s oil shock caused oil prices to rise by about 5x. More recently, when Russia invaded Ukraine in 2022, Brent traded above US$100 for more than five consecutive months (March–July), peaking at over US$130 per barrel—equivalent to over US$150 in today's dollars. Things could still deteriorate. But I see the current disruption as meaningfully less severe than those benchmarks suggest.

Inflation: an unwelcome tailwind

This oil move will push consumer price inflation (CPI) higher—but not toward double digits in my view. The 2022 experience was materially different, in that higher oil prices played second fiddle to a gargantuan fiscal and monetary expansion, which compounded an already strong post-COVID-19 rebound in demand. Today, the fiscal impulse in the pipeline, while meaningful, is of a much smaller magnitude.

Our elasticity estimates indicate that a 10% rise in the per-barrel oil price causes roughly a 0.20–0.25 percentage point (pp) uplift in headline CPI. Assuming Brent crude stabilizes near US$90 per barrel through mid-year, that is some 30% above the pre-war level, and this would translate in a 0.60–0.75pp incremental push to headline CPI—enough to reinforce underlying price resilience and likely nudge headline inflation toward 3.50%–3.75% by year-end. While unwelcome, this is not at crisis levels, in my opinion.

Growth: slower, not stalled

Higher gasoline prices will inevitably erode purchasing power and dampen household consumption, but this will be at least partially offset by the impending fiscal stimulus. Furthermore, on private investment, the artificial intelligence (AI)-driven capital expenditure cycle shows no sign of pausing, as Amazon’s bond issue this week illustrated.

My above-consensus 3.0% forecast for 2026 US gross domestic product growth now has some downside risk. Before the Iran conflict, I assessed recession probability as negligible—effectively zero. Clearly that’s no longer the case, but I believe recession remains a tail risk, not a baseline scenario. The directional shift might be toward moderation; the structural case for US expansion remains intact, in my analysis.

The US-Europe divide widens

The United States is currently the world's largest oil producer and a net energy exporter—a structural position built over the past decade. Europe, by contrast, still depends on imports for approximately 60% of its energy consumption; European gas prices have nearly doubled since the onset of the Iran conflict. The stagflation risk—weak growth coinciding with sticky inflation—is considerably more material in Europe than in the United States, echoing the asymmetry visible during the 2022 Ukraine shock, when eurozone growth suffered far more than the US economy did.