The Biggest Driver Of Inflation Is Getting Less Severe

The biggest driver of inflation, oil price shocks, has been decreasing in its contribution to global inflation variation. This shift has several potential implications for various asset classes, such as equities, bonds, and commodities.



Equities:
The decreasing severity of oil price shocks may lead to lower input costs for many companies, particularly those in the manufacturing and transportation sectors. This could result in improved profit margins and increased earnings, which could be positive for equity prices. However, the impact on specific sectors may vary. For instance, energy companies may face lower revenues due to lower oil prices, which could negatively affect their stock prices. The overall impact on equity markets is likely to be mixed, with some sectors benefiting and others being negatively affected.

Bonds:
Lower oil price shocks may lead to a decrease in inflation expectations, which could result in lower long-term interest rates. This could be positive for bond prices, as bond prices and interest rates move in opposite directions. However, the impact on bond yields may be limited, as other factors such as monetary policy and economic growth also play a role in determining bond yields. The overall impact on bond markets is likely to be modest, with lower oil price shocks contributing to a slight decrease in long-term interest rates.

Commodities:
The decreasing severity of oil price shocks may lead to lower volatility in commodity markets, as oil price shocks have been a significant source of volatility in the past. However, the impact on specific commodities may vary. For instance, other commodities such as metals or agricultural products may still be affected by supply chain disruptions and demand shocks. The overall impact on commodity markets is likely to be a decrease in volatility, with lower oil price shocks contributing to a more stable commodity price environment.



In summary, the decreasing severity of the biggest driver of inflation, oil price shocks, may have mixed implications for equities, modest implications for bonds, and a decrease in volatility for commodities. However, the overall impact on asset classes is likely to be limited, as other factors such as monetary policy, economic growth, and supply chain disruptions also play a role in determining asset prices and market conditions.