It shouldn’t be a surprise that the Middle East crisis has sent oil prices soaring, with the impact immediately felt on gasoline and diesel prices.

• Gasoline prices rose 21%, the largest monthly increase since data collection started in 1967.
• Fuel oil (diesel) rose 31%, the largest increase since 2000.

Unfortunately, there’s more to come as this incorporates data only through mid-March. Since then, gasoline and diesel prices have climbed even more, to the highest levels since mid-2022.

In US,

• Nationwide average gasoline prices hit $4.15/gallon. It was about $2.80/gallon two months ago.
• Nationwide average diesel prices hit $5.68/gallon, up from about $3.50/gallon two months ago.

In short, there’s more to come on the energy price increase front within official inflation data. Hopefully, a potential ceasefire that holds will send oil prices lower and gasoline/diesel prices as well. Just don’t expect prices to fall as quickly as they rose — prices go up like rockets but fall like feathers. We can see this from the 2022 episode as well.

The unfortunate parallels to the 1970s are increasing right now.

• Inflation spiked in 1973-74 amid a food and energy price shock (and subsequent lifting of price controls).
• The Fed started to tighten policy in 1973, which eventually sent the economy into a recession.
• However, the Fed eased policy in late 1974, and took interest rates much lower.
• Inflation pulled back from the big spike, falling from a peak of almost 12% (using PCE) to around 5-6%, but it didn’t pull lower as the Fed took its foot off the brakes.
• Eventually, we got a second inflation spike amid another food and energy price shock in 1978-79, which sent inflation back to 12%.
• Fed Chair Paul Volcker came in and raised rates to over 15% to ultimately crush inflation, in the process sending the economy into a big recession

This sounds eerily familiar, especially the first few steps. The levels of inflation and rates are lower than in the 1970s, but that doesn’t mean we don’t have a problem.

• We got the big post-Covid inflation spike in 2021-22, which took PCE inflation to over 7%.
• The Fed raised rates to over 5%, but pulled them down to around 3.5% as inflation eased.
• Inflation now remains stubbornly around 3%, just as we face another inflation spike.

The 1970s were hit by a nasty bout of stagflation– a period of high unemployment, high inflation, higher taxes, higher debt levels, and pitiful economic growth.

It was a brutal time to be an investor in mainstream assets. But people who invested in REAL assets did quite well (more on this in another article).

This current stalemate could translate into another episode of falling confidence in US government– an ideal environment for real assets, similar to the 1970s.