Oil prices jumped on Monday, as OPEC+ agreed to stick with existing production plans, resisting calls, including from the US, to ramp up output.
US shale producers cannot be relied upon this time around to increase drilling and output: the priority is firmly with shareholders, capital discipline, and rationalisation.
Investors will be forced to acknowledge the costs of the green energy transition when evaluating company share prices. Ironically, the larger tech companies in the US may be better prepared, with their investment into renewables.
It will also become harder for the Fed to concentrate on the core measure of inflation (ex-food & energy).
In any case, several US ‘underlying’ inflation metrics are beginning to show broader price pressures.
Despite building evidence of sustained inflation, there is a caveat: the recovery in corporate profit margins has been impressive and offers a cushion against ‘stagflation’ (see GFC Economics commentary ‘Correction in IT, Communication Services’, October 1st 2021). Unit labour costs are down 2.97% y/y.
