The most crucial question investors will have to consider in the coming years is undoubtedly the following: will inflation prove to be “transitory,” as the pandemic and the war in Ukraine have fueled it? Or will it turn out to be enduring? Indeed, there is no suspense. The answer is in the title.

The 1970s were by far the most inflationary decade in recent economic history. This makes it an essential point of reference for analyzing the current situation. Current events remind us that the starting point of this crisis was a surprise attack on Israel, which led to an embargo on oil exports from the Gulf to countries that had supported Israel during the Yom Kippur War.

There are many differences between then and now. It is also essential to understand that oil is far from the only factor at play. The first significant difference is that central banks, especially the Fed, have acted aggressively to raise “real” interest rates.

Secondly, developed economies consume less energy than they did in the 1970s and are less vulnerable to rising oil prices. In addition, the United States is now energy independent: they are a net energy exporter rather than an importer. Unfortunately, we cannot say the same for the EU.

Finally, climate change has a significant inflationary effect through “El Niño,” leading to more extreme weather conditions, disrupting food supply and driving up prices.

Protests and labour strikes are on the rise. We are far from the levels of the 1970s, but it is clear that inflation and the trend of strikes feed into each other.

Things have changed. The disinflationary regime of the 1990s and 2000s has long since given way to a more inflationary situation. The pandemic and the resulting public spending during lockdowns represented a massive inflationary shock, but the context had already evolved. The global economy benefited from a significant increase in labour when China opened up and the USSR collapsed. The system worked for everyone for a while. Multinationals found cheap labour and new markets to sell to, while China indirectly gained much technological know-how.

These “peace dividends” are well and truly depleted. The financial crisis of 2008 shattered the system that had been working. By 2016, the political tensions building up throughout this period turned into open actions, marking the beginning of a new economic and geopolitical cold war. China has changed its economic model, competing with a Western world that lags in many sectors.

As a result, we have transitioned from a world where wages were under constant pressure and goods and cheap capital flowed easily across borders to a world where frictions have increased in labour, capital, and goods. Supply chains will continue to be disrupted. Political considerations have become more important than economic ones. The creation of BRICS, the Sino-Russian rapprochement, and the shift of the Middle East into this camp at the expense of the West are concrete examples. We are witnessing a balkanization of economic activity. Some even talk about regionalization, which is replacing globalization.

As the world becomes less secure, the role of states becomes more critical, which is unfortunate because debt levels are alarming. For example, a more unstable world means governments will spend much more on defence. Just look at the performance of global defence sector stocks in recent days to see this.

Access to raw materials becomes a major issue. With a constant takeover of Africa, the Chinese and Russians understood this long before Western nations. The good news is that we expect the financial sector to focus more on natural resources and ways to invest in them very shortly, as investors realize that any form of energy transition will involve getting dirtier before becoming cleaner. The recent decisions by the British government in the North Sea are an excellent example.

The world is changing, and humans don’t like change. Investors, not machines, need time to digest information and reflect it in market prices.

In a short time, the last FOMC minutes did not bring any hope. According to the latest FOMC meeting minutes, policymakers agreed last month that policy should remain restrictive. The risks of excessive tightening should now be balanced with maintaining inflation on a downward trajectory toward 2%. In summary, FOMC members consider inflation unacceptably high and has more upside risks. The risk of further jeopardizing growth is also a concern. In short, policymakers are taking a pause, but they have yet to unpack their bags.

The minutes indicated that “a majority” of Fed officials believed that an additional rate hike “would likely be appropriate” to help temper demand and bring inflation closer to their 2% inflation target over the next two years, implying a likely new rate increase of 25 basis points before the end of 2023.

In a different report, the core inflation increased by 0.3% in September, stimulated by energy costs.