Will Higher Oil Prices Create Destructive High Inflation In The American Economy?

Today’s letter is brought to you by MoonPay ! Join over 30 million users who trust MoonPay as their universal crypto account. We make it easy to buy and sell crypto in over 180 countries , with no-to-low fees and all your favourite payment methods like Venmo, PayPal, Apple Pay, card and more. MoonPay is the only account you need in the DeFi ecosystem. Trade, stake and build your portfolio all in one place. Start now and get zero MoonPay fees 1 on your first transaction. CLAIM ZERO FEES To investors, The oil market is going through a rapid shift and those changes are poised to have a profound impact on the American economy. Everyone was celebrating back in January when energy prices fell 1.5% and gas prices at the pump fell more than 3% in the month. Gas prices were down 7.5% in the trailing 12-months, which was providing much needed relief to the consumer. All of that has quickly reversed over the last month though. Oil is up more than 60% in the last 30 days, mainly driven by a 42% gain over the last week. Gas prices have rocketed more than 14% higher during the last 7-days. This brings the average price per gallon to more than $3.40 nationally. It is no secret that the root cause of these price increases is the US-Israel attacks on Iran. The Middle Eastern country produces between 3.5 million to 4 million barrels of oil per day. This means Iran is responsible for about 4% of total global oil production. That may sound small, but Iran is the 6th largest oil producing country in the world. They are on par with China’s oil production output. So when the US and Israel decided over the weekend to broaden their offensive from only military targets to now include successful strikes on energy infrastructure and oil depots, oil opened higher last night. We would be talking about $120 oil price or more this morning, but the G7 countries quickly addressed the issue and announced they were preparing to release 400 million barrels of oil into the global supply. This immediate and drastic response of increasing supply has had a cooling effect on the oil market over the last 18 hours. Rather than waste time trying to predict the future oil price, I want to answer a single question: will higher oil prices create destructive high inflation in the American economy? To answer this question, we have to understand the relationship between oil prices and inflation. Thankfully, the World Bank published an analysis two years ago that examined the main drivers of global inflation. In the piece, they wrote: “ Drivers of global inflation. Oil price shocks were the main drivers of variation in global inflation with a contribution of over 38 percent, followed by global demand shocks with a contribution of about 28 percent over the past five decades, and much smaller contributions of global supply shocks and interest rate shocks. Impulse responses also suggest a more significant role for oil prices and global demand shocks. For instance, following a positive oil price shock of around 10 percent, global inflation increases by 0.35 percentage point within a year, and 0.55 percentage point within three years. In addition, oil price and global demand shocks were the main drivers of movements in global inflation around every global recession since 1970 (1975, 1982, 1991, 2009, and 2020). For example, in the early months of the COVID19-induced global recession of 2020, demand shocks severely depressed global inflation. Oil price and global demand shocks led the surge in global inflation between mid-2020 and mid-2022, as well as the disinflation since mid-2022.” This World Bank analysis would suggest that inflation is going much higher considering oil is up recently much more than 10%. But maybe there is more to the story? Let’s continue investigating… The Federal Reserve tends to agree that oil prices can have a big impact on domestic inflation. The central bank wrote a blog post titled “ Does oil drive inflation? ” and explained the relationship between oil prices and inflation: “[There is] a strong positive relationship between oil prices and PPI inflation: That is, higher oil prices are associated with higher producer prices and vice versa. Specifically, the correlation between oil prices and the PPI is 0.71. This strong link likely comes from the importance of oil as an input in the production of goods. In contrast, [there is] a positive but much weaker relationship between oil prices and CPI inflation: The correlation is 0.27, much lower than for producer prices. This weaker link between oil prices and consumer prices likely comes from the relatively higher weight of services in the U.S. consumption basket, which you’d expect to rely less on oil as a production input.” So the Federal Reserve acknowledges a significantly weaker relationship between oil prices and consumer inflation, which brings me to a very important point. If we learned one thing from 2025, it is that the economy is much more resilient than you think and high inflation can really only come from insane government spending. In addition, the current deflationary forces of tariffs, deportations, AI, and robotics are a formidable force that likely has a much bigger impact on consumer inflation than oil prices. For example, Truflation shows that US housing is already in deflation (down ~1.5% over the last 12 months) and housing is as much as 35% of the government’s CPI metric. Energy is closer to 4-5% of the CPI calculation, so what happens in the housing market is significantly more important. That is not all though. The Wall Street Journal’s Greg Ip wrote a column titled “ Why the Oil Shock Probably Won’t Derail the Economy. And One Way It Might .” He explains: “Higher oil prices are like a tax, cutting into household consumption while boosting inflation and interest rates. But that effect has shrunk as the U.S. became less energy dependent. The U.S. consumed 4% less gasoline in 2025 than in 2007, while producing 42% more goods and services (as measured by gross domestic product, adjusted for inflation). The share of households’ consumption of energy, including electricity, natural gas and gasoline, fell from 5.7% in 2007 to 3.7% last year. Meanwhile, the shale revolution has turned the U.S. into a net exporter of petroleum and major exporter of liquefied natural gas. That means the hit to consumers is offset by a boost to producers.” With this in mind, everyone just needs to take a deep breath. I know that won’t be popular to say, but it is true. The doomsday predictors are out in full force today. They will tell you the perils of a persistently high oil prices. They will promise you the world is ending or how the US economy is going to suddenly collapse. None of it is reality. The truth is that every single nation state involved in the Iran conflict is incentivized to get this over with quickly. The US wants to claim victory as fast as possible. Iran wants to stop the bombs dropping. China needs oil to import into their country. And European countries are simply looking to return to a world where stability rules the day. So if the conflict in Iran is short-lived, oil prices won’t be persistently higher. If oil is not persistently higher, then inflation is not going to soar to ridiculous levels. And if inflation doesn’t soar higher, the Fed is going to be forced to cut interest rates and print more money to deal with the deflationary forces. I don’t make the rules. I just try to watch what is happening in the world and figure out where we go from here. Hope you have a great start to your week. I will talk to everyone next time. - Anthony J. Pompliano Founder & CEO, Professional Capital Management The AI Boom Is Why Bitcoin Exists Jordi Visser is a veteran macro investor with 30+ years of experience and the author of the VisserLabs Substack. In this conversation, we unpack the chaos hitting markets in 2026—from weak jobs data and Fed uncertainty to private credit cracks, AI-driven disruption, and the collapse of old economic playbooks. 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