Despite his peers sounding the alarm about the potential for a U.S. recession for over two years now, Ed Yardeni, founder and chief investment strategist at Yardeni Research, has remained steadfastly bullish. The veteran market watcher, who spent decades in various prestigious Wall Street positions and previously served as a Federal Reserve Bank economist, has long argued that the odds of a “hard landing” for the U.S. economy are relatively low due to fading inflation and a strong labor market.
But on Monday, Yardeni revealed that the rapid rise in oil prices this summer has raised the prospect of a 1970s-style era of persistent inflation and a recession.
Brent crude oil prices, the international benchmark, have risen 30% to over $94 per barrel since June 27 amid consistent OPEC+ and Russian crude production cuts, leading to a more than 8% jump in U.S. retail gasoline prices over the same period. While the current $3.88 national average price for a gallon of gasoline remains well below its $5 June 2022 peak, Yardeni argued in a Monday note that the rising prices are “a concern.”
“If the price of oil breaches $100 per barrel and the price of gasoline rises solidly above $4.00 a gallon and both remain above those levels for a while, they could trigger a renewed wage-price spiral and higher inflationary expectations,” he warned.
A wage-price spiral occurs when workers demand wage increases to preserve their incomes during periods of inflation. This ultimately increases costs for businesses, which then raise prices to compensate, the theory goes, leading to spiraling inflation that can be difficult to tame.
“That scenario would be reminiscent of the 1970s,” Yardeni explained, quickly adding that this “is not the scenario we consider most likely, but it is the risk to our happier outlook.”
Because of the risk of returning to high inflation—as well as several other recent developments including the widening Federal budget deficit, the United Auto Workers’ (UAW) strike, and a potential government shutdown this month—Yardeni now believes the odds of a U.S. recession by the end of 2024 are 25%, up from his previous prediction of 15%.
Yardeni’s forecast clashes with that of Goldman Sachs, which lowered its recession odds to the historical average of 15%, from 25%, at the beginning of the month. Instead of warning signs, Goldman Sachs sees economic data that indicates low odds of a serious downturn.