Energy & Ukraine Crisis Compared to 1970s Inflation

high inflation

Russia’s invasion of Ukraine has emerged as a black swan event rattling the world during the past several weeks. We are witnessing on our TVs screens what a barbarian and treacherous dictator has unleashed on an innocent neighbor. Destruction of a beautiful country, innocent loss of life to its citizens and children, and a resulting humanitarian crisis on a magnitude of world war II. Apocalyptic describes the current war in Ukraine.

Russia’s huge invasion appears to have ended any hope the US consumers might possibly have had for any relief from skyrocketing inflation. As of Thursday morning, the average national price for a gallon of regular gas touched at $4.32 a gallon, according to AAA. This is the highest price in history, not accounting for inflation. Additionally, the White House announced its ban on purchasing oil and natural gas from Russia this past week.

So are we in the early stages of an energy crisis which threatens the return of 1970s inflation? It brings me back to 1971. I had just graduated from college and started my first real job at Coopers and Lybrand in Boston. Those were exciting years until 1973 when the Arab Producers of OPEC put in place an embargo on oil exports to the United States. This was in response to America’s support of Israel in a war. The result was an oil shortage across the country which led to panic at the pump. Back in those days, we called it an energy crisis; however, in many ways, it described the decade of the 1970s when oil shocks and soaring inflation defined the economy. During the 1973 oil embargo, the price per barrel of oil quadrupled, and then it doubled again in 1979 as a result of the Iranian Revolution.

The initial embargo stunned Americans as if we had come under a surprise attack. I can remember the scarcities and shortages as well as the higher fuel prices. We learned at that time that oil was the lifeline to the economy. It also remained vital for the country’s national defense. Back then, the gas lines that curved down the streets provided an atmosphere of pessimism. Fortunately, at that time, my means of transportation was a Volkswagon Beetle. The high oil prices also encouraged a switch to smaller vehicles and helped create the environment in which Japanese firms such as Toyota and Honda became dominant in the states. I can remember gas stations closing on Sundays and homeowners refraining from putting up holiday lights on their trees. I started my real estate career in the Lakes Region in 1976. We had to guarantee potential clients gas to get back to Massachusetts or Connecticut after looking at properties. Drivers would go to stations before dawn or late at night, hoping to avoid the long lines. In addition to gas rationing, the national speed limit was cut to 55 miles per hour, and daylight saving time was adopted year-round around 1974 or 1975.

If we think inflation is through the roof today, compare it to 1974 at 12% and 14.5% in 1980. Previously the Federal Reserve did not react until President Carter appointed Paul Voleeker as the Federal Chair, and we saw huge increases in interest rates to stop inflation. It’s hard to believe; however, in 1981, I was quoting a 30-year variable interest rate at 18% to my clients with a 5 cap over the length of the loan. You could not get a fixed-rate mortgage. It’s obvious that these outrageous rates killed the housing market in 1980-1982. Sadly it was runaway inflation which caused exploding interest rates, housing’s arch-nemesis. The eye-watering interest rates drove many consumers into renting rather than purchasing homes. The result was several years which were problematic for buyers, and I remember them well.

Millennials and Gen Xers are lucky they missed the harrowing economic events of the late 70s and early 80s. Right now, interest rates are still super low, and all of the Realotrs® in the Lakes Region have experienced a golden era for home buying. It’s like the Fed has pumped helium into the economy for over 10 years, and the stimulus incentives have been jaw-breaking.

However, let’s fast forward and look where we are today. We are seeing steady increases in inflation. The CPI index increased 7.9% year over year in February of 2022. This is the biggest annual rise since January 1982 (40-years). As the impact of the Ukraine war intensifies and the huge humanitarian crisis unfolds, it’s obvious it will fuel a continued sharp hike in inflation, and the increased cost of energy will play a significant role. The shock waves from the Russian invasion and the pressure on oil and gas will ultimately lead to higher inflation, and we will likely see continued volatility in the stock market. Consumer confidence is key, and right now, there is major uncertainty around the world as to what the outcome will be.

Could the 1970s inflation era happen again? We will tread carefully as time unfolds. There could be political surprises like Brexit, the handling of fiscal and monetary policy could bring about the devaluation of the dollar, which I worry about. That could lead to high inflation. We have seen the Federal Reserve flooding the economy with dollars simply by printing, and the national deficit is reaching for the stars ($30 trillion). We have soaring commodity prices which adds more confusion to where the Fed goes from here. Russia’s invasion has led to some of the most punitive economic sanctions in history. Russia’s currency and the stock market have tanked. Interest rates are at 20% in Russia, and US corporations are exiting the county in droves. Russia is the world’s largest exporter of natural gas and the second-largest oil exporter, which draws parallels to the oil price shocks of the 1970s, which led to galloping inflation. Also, the invasion threatens the global food supply. The two countries supply nearly 1/3 of global wheat and barley exports. Wheat prices have jumped to the highest level since 2008. Think of how many food products have wheat as a primary ingredient. Add to the list many minerals, aluminum, nickel, fertilizer, corn, and other exports that Russia and Ukraine export.

It appears that higher energy and commodity prices could make consumers more apprehensive about making big purchases, and the situation in Russia and Ukraine is creating significant uncertainty. But for now, experts are reticent about changing their forecast for the spring housing market despite acknowledging that the future is more unpredictable than it was before. I have not seen demand slow down in the Lakes Region thus far. Most of our Realtors® at Roche Realty Group have a lot of showings scheduled for this weekend. The demand is there, and the inventory shortage is the lowest in the state’s history. At the present time, there are only 683 single-family homes for sale in the entire state of New Hampshire, and there are only 177 priced under $300,000. However, according to Dolly Lens, a luxury real estate Broker in New York City, “She’s getting inundated with Russian clients who are considering selling their US real estate holdings located in some of Miami’s and New York Cities most exclusive neighborhoods…the heat is up, and they’re scared that they’re going to potentially have their real estate seized.” Sounds like the definition of “what goes around comes around.’

Frank Roche, President of Roche Realty Group, Inc. with offices in Meredith and Laconia, NH

This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, NH, and can be reached at (603) 279-7046. Housing data was pulled from NEREN 3/10/2022 at 4:30 pm EST and is subject to change. Please feel free to visit www.rocherealty.com to learn more about the Lakes Region and its real estate market.

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