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By Jim Iuorio
“Inflation is always and everywhere a monetary phenomenon.” - Milton Friedman.
In the first week of Econ 101, students learn that inflation is “too much money chasing too few goods.” It’s a definition that is both true and deceptively simple. Over time, markets have become conditioned to focus almost entirely on the “too much money” side of the equation and in doing so have often underestimated the supply side.
The Fed’s toolkit is purpose-built for excess demand. When policymakers believe there’s too much liquidity in the system, they tighten financial conditions to remove it. Supply shocks operate on entirely different logic. They generate inflation without necessarily creating excess demand, which is why they’ve historically sparked debate about the limits of monetary policy.
Oil shocks, in particular, have never fit neatly into the traditional inflation playbook.
To understand the inflationary pressure building from energy prices today and the potential long-term economic implications - it helps to look at where markets have been, though the past may only take us so far.
Since 1970, there have been multiple major oil supply shocks that materially impacted the global economy. Two of them are worth examining closely: the 1973 oil embargo and the Iranian Revolution of 1978–79.
In October 1973, OPEC cut off oil supplies to the United States and several allies in response to US support of Israel during the Yom Kippur War. The geopolitical reasons matter historically, but for the purpose of this analysis, the mechanics are more important than the politics. Crude prices nearly quadrupled almost overnight.
Fed Chairman Arthur Burns responded aggressively. The Fed funds rate was pushed from roughly 5% to 13%. The combination of higher rates and surging energy costs was brutal: U.S. equity markets fell nearly 50%, and a deep recession ran from late 1973 through 1975.
Eventually, the Fed reversed course and brought rates back down toward 5%, a level that, at the time, was considered relatively accommodative. Worth noting: that "accommodative" level reflects a very different economy, debt structure and world compared to today.
However, inflation never fully disappeared. In the years following the recession, inflation remained stubbornly elevated, averaging over 5% until 1978.
Then came a second shock in the Iranian Revolution. The Shah was overthrown, the Islamist regime took power and Iranian oil production collapsed. Crude rallied from roughly $15 to $40 per barrel. While the second spike wasn’t quite as significant as the first, its cumulative impact was devastating. Inflation surged to 14% by 1980.
Fed Chairman Paul Volcker made the decision to attack inflation head-on, even at the expense of the economy. Rates moved dramatically higher and the U.S. entered another deep recession that stretched well into 1982.
The pattern, in both cycles, followed a similar sequence: oil spikes, inflation accelerates, the Fed raises rates, a weakened economy tips into recession and eventually the Fed cuts to stabilize growth.
Since the 1970s, we’ve experienced several smaller oil shocks, and most followed some version of that same economic arc. The cycles were less severe because the disruptions were smaller but also because the structure of the US economy had begun to evolve. This evolution is the most important part of the story.
In 1973, roughly 45% of the S&P 500 was concentrated in highly energy-sensitive sectors such as manufacturing, industrials, utilities and materials. Today, nearly 50% of the S&P 500 and roughly 70% of the Nasdaq-100 are tied to technology and communication-related businesses, sectors that are materially less sensitive to oil prices.
Meanwhile, the United States now produces nearly as much crude oil as it consumes. While the U.S. still isn’t fully energy independent due to refinery configurations and crude quality mismatches, the country is much less vulnerable than fifty years ago.
The labor market tells the same story. In 1970, tech and tech-adjacent jobs accounted for roughly 3.5% of the U.S. workforce. By 2026, that figure has surged toward 25%. Even many non-tech industries now rely heavily on software, automation, cloud infrastructure and AI-driven productivity tools. In other words, today’s economy consumes energy very differently than the economy of the 1970s.
Today, there is another factor that has no real historical precedent.
We are currently in the middle of one of the largest capital expenditure booms, driven almost entirely by the artificial intelligence (AI) buildout. Data centers, cloud infrastructure, semiconductor investment, electrical grid expansion and power generation projects continue accelerating despite inflationary pressures and elevated interest rates.
What makes this cycle unique is the competitive urgency behind it. In a traditional slowdown, corporations typically pull back. They cut spending, shelve projects, reduce risk and wait for conditions to stabilize. Historically, that collective behavior often accelerates the very recession it's trying to protect against.
Corporations seem to be responding differently this time. Big Tech doesn’t appear particularly concerned whether oil is $60 per barrel or $160 per barrel. The prevailing mentality seems to be: expand, or fall behind permanently. For now, they appear to have chosen expansion.
As a student of economic history, the instinct is always to find the parallel, draw the comparison and fit the present into a familiar framework. There is wisdom in that discipline, and the hubris of believing "this time is different" has created challenges for both investors and policymakers.
But sometimes, it actually might be different. Today’s stock markets are shifted toward tech, the domestic energy picture has changed, and the nature of investment spending driven by AI urgency all introduce variables the historical models weren't designed to account for. The 1970s are instructive, but they are not a blueprint.
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