January 24, 2022

Oil/Expected Inflation Divergence: Canary In The Coal Mine?

The rise in oil above $80/barrel adds to pressure on the Fed to withdraw pandemic stimulus as soon as possible. Nevertheless, the oil surge may also be a “canary in the coal mine”, warning that too many interest rate hikes already are discounted for 2022. Long-term inflation expectations embedded in the bond market have not followed oil higher, in contrast with the tight correlation of the past decade (see Chart). This fits with Alpine’s view that inflation expectations are well-grounded and that inflation surprises will be to the downside later this year.