Surging oil prices could sour soft landing hopes, but it won't spark a crisis like the 1970s, market veteran says

• Market analyst Ed Yardeni increased the odds of a recession from 15% to 25% by next year's end.
• Rising oil prices motivated the adjusted outlook, as they could pressure inflation higher.
• But don't expect a repeat of the 1970s thanks to the productivity boom, he added.

Market analyst Ed Yardeni raised the odds of a recession before the end of 2024, citing higher oil prices and widening deficits.

In July, Yardeni had lowered the likelihood of a recession, but the 30% spike in oil since late June has given him reason to reassess. 

"Today, in response to several new developments, we are raising the odds of a recession before the end of next year from 15% to 25%," he wrote in a Monday note.

Oil's meteoric rise this summer follows as OPEC's crude production cuts have started to weigh down on oil supplies, which are falling behind demand.

If high oil prices set off a wage-price spiral and higher inflationary expectations, that would be reminiscent of the 1970s, Yardeni noted, when similar conditions paved the way for a recessionary crisis.

But there are key differences that won't result in a repeat of that decade, he explained, particularly the disinflationary tech-driven productivity boom expected this decade.

Unlike the 1970s, compensation inflation is moderating today, and Yardeni estimated productivity growth to reach 4% by this decade's end. That's as a technology boom will make nearly every economic sector more efficient.

"So we don't expect to see a second peak for inflation that would force the Fed to cause a recession to bring inflation down," he wrote. 

And while oil prices spiked by triple digits during the 1970s, they were fueled by a weak dollar. Today, the currency remains strong, blunting a more dramatic rise in crude pricing.

Still, Yardeni's concern over oil prices extends to other analysts. On Monday, top economist Nouriel Roubini cited oil as a headwind pressure for global growth.

Other potential headwinds cited by Yardeni include the growing US deficit, as well as the United Auto Workers strike and a potential government shutdown.