The first wave becomes visible.
Demand hits a thin commodity supply base. Geopolitical shocks intensify the move, but the underlying problem is physical scarcity.
Recurrent Research
The Great Inflation Misdiagnosis
Rate hikes can bring an inflationary fever down, temporarily. The Fed cannot drill a well, open a mine, or build a refinery.
In Recurrent's 1989–2022 sample, recessions and Fed tightening predicted lower inflation about as well as a coin flip. High commodity capex was the cure that lasted.
Markets treated the dip in inflation as proof the shortage was over. The dip itself helped keep capex from arriving. That is how a pause becomes a second wave.
The physical problem
A shortage is not a mood.
Inflation appears when ordinary growth runs through a commodity supply base that never caught up. The economy can look fine while it is eating the last cycle's spare inventory. Then the cushion is gone.
01The cushion disappearsLow capex lets ordinary growth consume the spare supply left by the prior cycle.
02Policy buys timeRate hikes can force demand back inside the existing supply base. They do not add a ton, a barrel, or a watt.
03The remission is the trapLower prices take the urgency out of capex before the shortage is actually cured.
04Capex changes the endingNew capacity lets supply outrun demand, bringing durable price relief and eventually the next commodity bust.
A commodity shortage is not cured by crushing demand. It is cured by investing in new supply.
The historical test
What actually preceded lower inflation one year later?
Recurrent historical sample, 1989–2022Likelihood of below-average inflation one year later
50% reference = coin flip
Recession
47%
Fed hikes
54%
High commodity capex
73%
If inflation were mainly an overheating problem, weak growth and tight policy should have been the reliable off-switch. They were not. Supply expansion was.
Methodology and definitions
Source: Recurrent, The Great Inflation Misdiagnosis (2022). The percentages shown use the 1989–2022 sample. “High commodity capex” refers to the top quartile of inflation-adjusted commodity capital spending in Recurrent's framework; the outcome is below-average inflation one year later. Recession and Fed-tightening observations use the definitions in the original research. These are historical conditional frequencies, not causal estimates.
What would make this argument look weaker?
A multi-year surge in real commodity capex followed by persistently high inflation would cut against the framework. So would a late-1970s-scale buildout in the 2020s followed by continued shortage behavior across the long-cycle commodity complex.
The 1970s, in sequence
The 1970s were not one inflation. They were two.
The dangerous moment is not the spike. It is the remission. The mid-1970s pause lowered headline inflation before the supply response arrived. That is the part of the cycle that rhymes with 2023–25.
The first wave was a commodity shock intensified by geopolitics and met with Nixon-era price controls. Inflation cooled when demand did. Capex did not take the handoff.
The second wave is the one popular memory compresses into “Volcker.” By then the investment backdrop had changed. Oil-price decontrol improved the economics of new drilling, real commodity capex accelerated, and new supply began to change the ending.
CPI, year over year
Inflation-adjusted commodity capex
Source: Recurrent research; U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; St. Louis Fed/FRED. The figures compare the historical 1970s path with the 2019–26 period.
Inflation cools. Capex does not take the handoff.
Recession and tighter policy bring the fever down. The urgency leaves with the headline numbers, and the supply response remains too small.
Ordinary growth is enough to expose the gap again.
The economy does not need to boom. Demand only has to recover faster than the commodity supply base can respond.
Oil-price decontrol changes the investment math.
Carter's move toward decontrol improved the expected return on new drilling. Real commodity capex accelerated before Volcker got the credit in the popular story. That is the step the 2020s have not taken.
New supply changes the ending.
Volcker can suppress demand. The expanding supply base helps make lower inflation compatible with recovery. The broader economy inherits room to grow; commodity producers inherit the bust.
Why capex can stay missing
High prices do not make a CEO build.
A company can be printing cash and still refuse to grow. If the market values existing assets below replacement cost, a new project can destroy market value even when its operating economics look attractive.
A simple replacement-cost example
Replacement cost of existing assets$40B
Market enterprise value$20B
Implied EV / replacement cost0.5×
Cost to build a new mine$10B
Value the market may assign at 0.5×$5B
Spend $10B to create $5B of market value. In that math, buybacks beat drill bits.
High prices and high profits do not consistently pull capex through. The market can finance a technology story at 5× invested capital and tell a profitable miner to shrink. That was load-bearing in the ESG-divestment years. It is still load-bearing now.
You cannot solve a capex shortage by making capex less attractive.
Policy and the investment case
Borrowed barrels and bent rules can hide a shortage. They cannot end one.
Price caps, SPR drains, a surge in Venezuelan barrels, small-refinery exemptions (SREs), and gasoline blending waivers can take the spike out of the chart. They are borrowed barrels and bent rules. They do not add productive capacity.
For a project that spends years 1–5 earning nothing, those interventions are not noise. They are a reason to wait.
The 2020s rhyme
The first wave has passed. That is not the same thing as the shortage being over.
2023–2025 wasn't a repeat of 1975–77, but to paraphrase Mark Twain, it sure did rhyme. Inflation fell just enough to convince markets the problem was over. Commodity capex slowed, leaving the system more vulnerable when geopolitical shocks tightened supply. In both decades, weak mid-cycle capex left the economy entering the next shock with less room for error.
In 1978–79, storage made a shortage look manageable until the tanks were empty. In 2025–26, the same trick is easier in short-cycle oil than in long-cycle infrastructure.
1978Iranian supply collapses.
The shock begins, but inventories and spare capacity initially cushion the visible price response.
Late 1978Stocks are drawn rapidly.
Storage tanks stabilize prices by feeding previously produced barrels into the market.
1979The cushion is gone.
Only after inventories have been drawn down does the shortage fully appear in price.
Borrowed supply is not new supply. During the Iranian Revolution, stocks were drawn rapidly to stabilize prices. The larger oil-price move came only after storage tanks had been drawn down and the cushion could no longer absorb the shortage.
Oil can still be buffered by inventories and a relatively fast supply response. Refineries, LNG plants, pipelines, power plants, smelters, and mines cannot. In the current energy complex, the long-cycle products have done the inflating. Those prices are the capex deficit showing up.
Only capex ends persistent commodity inflation.
Storage and demand destruction can hide it. They cannot finish it.
That is why the 2023–25 disinflation is the dangerous part of the rhyme. In the mid-1970s the respite arrived before the supply response. Capex stayed timid. Inflation returned with ordinary growth.
If you think the Fed already did the hard part, you are betting that a shortage disappears without anyone building the missing assets. History is not kind to that bet.
Research basis: Recurrent Advisors, The Great Inflation Misdiagnosis (2022), and Recurrent monthly research through 2026. Historical analogies are illustrative; no two cycles are identical. Historical conditional frequencies are not proof of causation. For research purposes only. Not intended as investment advice.