Inflation: Are the 1970s an analogue for the 2020s?

A logical place to start is with a discussion of inflation. Inflation is on everybody’s minds at the moment. And I’m asking the provocative question here: Are the 1970s a useful analog for where we find ourselves today?

If we think about the 1970s, there were three key drivers which drove inflation through that decade. Firstly, there was demographics. Secondly, there was the end of cheap US energy. And thirdly, and perhaps underappreciated by many, is the massive secular increase in CapEx through a variety of sectors through the 1970s to provide the goods, the households the durable goods and that were required at the time.

Starting with demographics, in the 1970s, the world added 33% more people in the 20 to 35 year-old age bracket than previously sat at that level. That’s a quarter of a billion people. And if you look at the demographic chart on the lower left-hand side of the slide, you can see the delta between 1980 and 1970 by 5-year age brackets. And you can see the wedge that drove commodity consumption through the 1970s.

What was also interesting about the 70s is the industry largely responded. If we start with energy, obviously many are familiar with the OPEC embargoes in 73 and again in 79, but what’s interesting about that time is the industry responded and we opened up two new oil provinces. Firstly, in the North Sea with the opening of the Brent oil field in 1976. And then one year later we opened Prudhoe Bay in Alaska.

In the nuclear sector, looking at power, in the 1970s we added close to 170 new nuclear reactors. So, that nuclear energy expansion that we saw, powered by uranium and powered by many metals that went into the construction of carbon free baseload power, and that was a tremendous response. And the 70s were really with the United States built the majority of its reactors and in France towards the latter part of the 70s we’re building started to build theirs.

And thirdly a little bit closer to home, mining in the 1970s, it really was the great mining build-out. That’s when the Pilbara iron ore deposits really got going. It’s when Latin American copper and other base metals got going. There’s a tremendous article in the Engineering and Mining Journal, I shared a link here in the in the presentation for everybody. It’s worth reading for those that are interested in the history of the build-out of the mining sector.

The last graph I’ll share with you with regards to comparing 1970s through to today, is a a graph of global fixed capital formation as a percentage of GDP, lower right-hand side on the slide. And what’s interesting when I look at that graph, the average global capital fixed formation, or in one way of thinking about it, that’s plant property and equipment, that’s essentially, the investment that produces everything that we need. That averaged 26-27% consistently over the 1970s. And what’s interesting, when you look at that, we’ve been for 50 years, perhaps living off that investment in many, many ways. You can see how that graph declines around the year 2000, but encouragingly since the year 2000 that’s been building.

So, we’ve been adding more and more plant property and equipment to the global industrial base, since that time. And what’s interesting everyone is aware of the lives of China and everything that’s gone into the urbanization and in the 400 million people in China that have been brought into middle and upper income through the tremendous economic growth in that country. But when you look at that graph, it’s more than a China story today and we’re approaching the levels that we saw in the 1970s. And if we’re going to continue to provide an advanced and modern livelihood for a number of people around the planet, it’s beyond a China story today. And that’s really important when we consider where demand is and where demand is going for metals and mine resources around the world.