Standard Chartered economists Dan Pan and Steve Englander say the recent rise in oil prices is unlikely to lead to a 1970s-style stagflation in the United States. They expect a one-off lift in headline inflation, with smaller effects on core inflation and GDP, while the Federal Reserve keeps policy unchanged as the labour market cools.
They note that US energy consumption has levelled off since the late 2000s, and energy spending now takes a smaller share of household and business budgets. They also point to a softer labour market over the past two years, with easing wage pressure.
They state that a wider output gap than in 2022 means more of the shock may show up as lower real wages rather than higher inflation. Under their base case, using the Fed’s FRBUS model, headline PCE could reach 3.1% in Q2.
They estimate core inflation may stall near 3.0% year on year in the near term, then level off in Q4. They add that unemployment could rise slightly above 4.5%, with a marginally negative effect on growth.
They report that markets have removed over 50bps of expected Fed easing for the year and now price a small chance of a rate rise. They say the model shows weaker growth offsetting near-term inflation risk, and they expect policy makers to wait for clearer evidence.
The recent oil price surge is not shaping up to be the stagflationary shock some feared. After spiking above $110 a barrel late last year, Brent crude has since settled into a range around $95. We are seeing a more resilient US economy, where energy’s share of consumer spending has fallen to around 4%, compared to over 8% during the shocks of the 1970s.
We expect this will mainly be a one-off hit to headline inflation, with limited spillover. The February headline PCE data confirmed this view, rising to 2.9% year-over-year, while core PCE held steady at 2.8%. This reflects the softening we have seen in the labor market since 2025, which is keeping underlying price pressures contained.
This backdrop suggests the Federal Reserve will remain on hold, just as they did at their meeting last week. While the market had priced out the aggressive rate cuts we saw anticipated in 2025, a hiking cycle seems equally unlikely now. This points to a strategy of selling interest rate volatility, as the Fed appears comfortable waiting for more data before signaling its next move.
The impact on growth should be mild, with unemployment expected to drift just above 4.5% later this year from its current 4.3%. This is a slowdown, not a recession, meaning deep-seated fears of a major economic downturn are likely overblown. Consequently, implied volatility on equity indexes looks elevated, and selling VIX futures could be a favorable position in the coming weeks.
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