Inflation: Back to the 70s?

Near-term inflation risks are tilted upward, but the United States is unlikely to return to a persistent 1970s-style inflation regime because medium-term demand and labour-cost pressures remain contained.

• Energy and food prices are rising after the war with Iran, climate-related supply risks and a scorching summer, while booming AI investment is adding pressure to semiconductor and electronic-goods prices.
• Unlike the 1970s, wage growth is not currently far above productivity growth, so unit labour costs do not yet signal a persistent inflation problem; the labour market is looser than in 2022 but remains relatively tight.
• Muted private-sector credit growth and a smaller scope for households to reduce saving contrast with the Covid period, when government transfers and QE-financed fiscal stimulus drove a sharp income and inflation surge in 2021/2022.
• Labour-force growth has turned negative because of ageing and immigration measures, which could constrain real output and increase sensitivity to supply shocks; however, this differs from the rapid employment growth seen during the 2022 inflation shock.
• If AI generates strong productivity gains, it could reduce unit labour costs and inflation, while net job losses could make it disinflationary or deflationary; if productivity disappoints, excessive AI capital expenditure could eventually contribute to a recession.
• The long-term outcome will depend on monetary and fiscal policy, including the possible scale of future QE-funded fiscal stimulus and the effectiveness of rate cuts if AI causes net job losses.

Takeaway: Investors should prepare for inflation and rates to rise in the very near term, potentially fall sharply in the medium term, and remain highly dependent over the long term on AI, demographics, debt and the policy response.