As Gas Prices Break Records, World Bank Warns of 1970s-Style 'Stagflation'

World Bank Stagflation 1970s Gas Prices Record
The World Bank warned on Tuesday that the global economy could be headed toward 1970s-style "stagflation." Above, gas station attendants are pictured holding a "Sorry no gasoline" sign in Portland, Oregon, in this photo from 1973. Smith Collection/Gado/Getty

As U.S. gas prices reached an all-time high, the World Bank issued a warning that a combination of rising inflation and a slowdown in economic growth could lead the global economy into 1970s-style "stagflation."

The price of gas in the U.S. hit $4.91 per gallon on Tuesday, according to AAA. On the same day, the World Bank issued its latest Global Economic Prospects report—which compared current economic conditions around the world with those during the "stagflation of the 1970s," spelling potentially bad news for the global economy due to issues including fiscal damage caused by the COVID-19 pandemic and the Russian invasion of Ukraine.

"The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth," World Bank President David Malpass said in a statement. "For many countries, recession will be hard to avoid. Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality."

The report states that the current economy resembles that of the 1970s in key areas: "persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging markets and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation."

The World Bank said that inflation around the world was "expected to moderate next year," but could remain above targets in "many economies." It said that economic growth in "advanced economies" was projected to decelerate from 5.1 percent in 2021 to 2.6 percent in 2022, with a further deceleration to 2.2 percent expected by 2023.

However, it was also noted that the current economy differs from that of the 1970s in several important areas, including the U.S. dollar currently being strong, smaller percentage increases in commodity prices, strong "balance sheets of major financial institutions" and better controls on price stability through central banks and a track record of meeting inflation targets.

In a foreword to the report, Malpass wrote that insights drawn from the recovery from 1970s stagflation were "sobering," noting that "the interest rate increases that were required to control inflation at the end of the 1970s were so steep that they touched off a global recession, along with a string of debt crises in developing economies, ushering in a 'lost decade' in some of them."

Malpass also warned that "pain of stagflation could persist for several years" even if a global recession is avoided. "Major supply increases" were suggested to mitigate the risk, in addition to measures such as countering the spike in food and oil prices, increasing social safety nets, stepping up debt relief efforts, reducing dependency on fossil fuels and limiting the damage of the pandemic and the Ukraine war.

In addition to current economic conditions potentially setting off 1970s-style stagflation, concerns have also been raised that pressure at the pumps could go beyond sky-high fuel prices. International Energy Agency head Fatih Birol told Der Spiegel last week that the current energy crisis was "much bigger" than the crisis in the 1970s, when American motorists faced long lines at gas stations and empty pumps due to recurring fuel shortages.

"We have an oil crisis, a gas crisis and an electricity crisis simultaneously," Birol said, according to Insider. "When the main holiday season starts in Europe and the U.S., fuel demand will rise ... Then we could see shortages—for example, in diesel, petrol or kerosene, particularly in Europe."