ep 359 | Could 1970s-style stagflation happen again today?
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On Point with Craig's Investment Partners. The information provided here is general in nature and it's not financial advice. It doesn't take into account your situation, objectives, goals or risk tolerance. All investments are subject to risks and none are guaranteed. Before you make any investment decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners Financial Advice Provider Disclosure Statement, please visit our website which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
G'day team, hope you're all well. Today I wanted to talk about stagflation because that has been back in the headlines over the last few weeks as we've got this oil price shock that threatens to push inflation back up and at the same time it could take a big chunk out of economic activity. Now stagflation is a term that they use to describe a particular set of economic conditions. Low growth or high unemployment, but also high inflation. It is a highly undesirable combination. We've seen our Reserve Bank here in New Zealand suggest that our inflation rate could hit 4.2% in the June quarter. That's more than double the 2% midpoint of its target range. while the IMF, the International Monetary Fund, recently released a scenario that sees global inflation at 5.4%, and an even worse scenario that sees it above 6%.
So those are just potential outcomes. They're not predictions from the IMF, but they would go hand-in-hand with a fairly bleak economic outlook. now when we think about stagflation the most well-known period where we saw that was the 1970s and that was a decade that was terrible for investment returns u.s shares corporate bonds and real estate all posted respectable but below average annual gains of between five and seven percent over those ten years so five to seven percent per annum over that decade through the 1970s None of those kept pace with rampant inflation. Inflation averaged 7.4% over that whole decade. So in real terms, inflation-adjusted terms, investors actually went backwards and made no money.
In fact, they lost money. They lost purchasing power. It was even worse here in New Zealand. Our inflation in the 1970s averaged 12% per annum. 12% for the whole decade if you go point to point from the end of 69 to the end of 79. Now that outpaced the local share market and it eroded a whole decade's worth of house price rises. There weren't many places for investors to hide through this period. Gold and commodities were two of the only things that performed well Gold surged 14-fold over the 1970s, and it's never come even remotely close to repeating those returns. It did about 30% per annum for the whole 10 years. Farmland was also strong on the back of high commodity prices and demand for tangible assets that would be better insulated from that higher inflation.
So US farm prices increased 13.8% per annum over that decade. Now, it's really difficult to pinpoint exactly what led to this environment. Soaring oil prices were definitely a part of it, as was high government spending, wage demands from very powerful trade unions, this is in the US, and all of those things together conspired to end the prosperity of the previous two decades. The 1950s and the 1960s were pretty prosperous in the United States, but the energy shock was probably the biggest factor. So that has a real similarity with what we're seeing today. Now back then, it was because the oil producing countries cut supply in the wake of the Yom Kippur War in 1973. That was a conflict between a coalition of Arab states and Israel.
And that saw oil prices soar from about US$3 a barrel to four times that in a pretty short space of time. So American oil production had already peaked a few years before this, and it just couldn't keep up with the growing demand from vehicles, from all those gas-guzzling V8s from the 60s that people like me know and love.
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