Rapid inflation surges typically come with oil price shocks. But they could go in the opposite direction too, which is a narrative the market’s discounting as crude remains stagnant. It happened in 2014, when Chinese growth concerns were eventually reversed by OPEC intervention. Now, downside risks are mounting from Libyan oil supply to the temptation for American shale producers to drill at $40. Add ongoing demand risk with economies crippled by Covid, and suddenly OPEC is in the hot seat again, charged with preventing prices from going backward.
This is something the Fed should care deeply about too if it’s truly worried about a deflationary spiral. Because it’s what could exacerbate it.
This is something the Fed should care deeply about too if it’s truly worried about a deflationary spiral. Because it’s what could exacerbate it.