Oil prices have reached new heights this quarter, potentially leading to a resurgence in inflation and prompting the Federal Reserve to continue increasing rates. This scenario could be bearish for risk assets, such as cryptocurrencies. The recent oil price rally might exacerbate the situation, with the per barrel price of West Texas Intermediate (WTI) crude surging by 30% this quarter, surpassing the $93 per barrel mark for the first time in 2023.
Impact of Higher Oil Prices on Inflation and Risk Assets
When oil prices rise, retail fuel prices usually follow suit, which in turn affects key inflation metrics like the Consumer Price Index (CPI). As a result, households may experience a decrease in disposable income, leading to weaker consumption, slower economic growth, and less inclination to invest in high-risk, high-reward assets such as bitcoin and technology stocks. A persistently high CPI could prompt the U.S. Federal Reserve and other central banks to raise interest rates further and maintain them at elevated levels for an extended period, thereby diminishing the appeal of risk assets.
Rising Rates and the U.S. Dollar
Higher interest rates often coincide with a strengthening U.S. dollar, which tightens financial conditions globally. This development is generally bearish for risk assets. Historically, bitcoin has primarily moved in the opposite direction of the dollar index. Traders should be cautious of a potential WTI breakout above $100.
Comparing the Current Inflation Situation to the 1970s
One topic frequently debated in financial markets is whether the current inflation scare resembles the 1970s, when the U.S. economy experienced multiple waves of inflation due to an energy crisis. If history were to repeat itself, the result would be stagflation, which is the worst possible outcome for risk assets. However, there are key differences between the two periods, primarily in terms of wage growth.
The Role of Wage Growth in Inflation
Unlike the 1970s, the present situation is characterized by anemic wage growth. Real wage growth has turned negative rapidly, significantly slowing consumer demand. This factor reduces the likelihood of a prolonged second spike in inflation.
Conclusion
In summary, the recent surge in oil prices could have far-reaching implications for inflation, interest rates, and risk assets. While comparisons to the 1970s are inevitable, the current scenario is marked by weak wage growth, which may temper the inflationary impact. Nonetheless, investors should remain vigilant and monitor developments in oil prices, interest rates, and the global economy to make informed decisions about their investments in high-risk assets such as cryptocurrencies and technology stocks.
