AhlulBayt News Agency (ABNA): The Daily Telegraph, in an analysis, wrote that inflationary pressures resulting from rising fuel prices prompted the White House, despite the failure to achieve the initial objectives of the war, to agree to a deal with Iran to exit the crisis and reduce economic costs.
The right-wing Daily Telegraph added in this analysis, "Higher fuel prices, which are fueling broader inflation, explain why Donald Trump was eager to end the war with Iran."
The weekend news of a ceasefire in the Persian Gulf—allowing oil to flow again through the Strait of Hormuz—has partly addressed concerns. Oil prices have reacted accordingly, removing some of the concerns from the inflation outlook and thus somewhat lowering interest rate expectations. The same applies to the Federal Open Market Committee, which faces an interest rate decision this week. This will undoubtedly disappoint some in the media.
Many held the view that Donald Trump had trapped himself in a war from which he could not escape, a war that would likely have catastrophic consequences for inflation and the global economy. But Trump is not completely stupid, and markets never fully believed he was. For now, their apparent satisfaction in the face of growing media hysteria has been justified. The key word here is, of course, "for now," because although this appears to be a sustainable ceasefire, it is only a memorandum of understanding and depends on the behavior of Israel and Hezbollah. Moreover, we do not know many details about it.
Nevertheless, oil market traders from the outset believed that the likelihood of a final deal was greater than no deal, which is one of the reasons prices remained relatively low throughout the severe supply disruption caused by the closure of the strait. The idea that 20 percent of the world's crude oil, condensates, and petroleum products flow through the Strait of Hormuz is repeated like a divine revelation. This may have been true historically, but it is clearly not the case today. Major economies have compensated for this shortfall by drawing heavily on strategic reserves.
At the same time, the world is quickly learning to live without the oil and other petroleum products that were previously transported through the Strait of Hormuz. Alternative pipeline supplies have increased significantly, and rival producers have stepped in to fill part of the gap.
Meanwhile, China has drastically reduced its oil imports, helping to compensate for the reduction of approximately 15 million barrels per day of crude oil that previously came from the Persian Gulf. This has been partly achieved by turning to abundant domestic and coal-based energy sources.
Elsewhere, higher prices have led to significant demand destruction, but so far the macroeconomic consequences have been relatively limited. The main point? The latest oil price shock has not been as impactful as many expected. However, there is growing evidence that higher fuel prices have fueled broader inflation, precisely as we were recovering from the last such period. This explains why the White House was eager to reach a deal, even though few of the war's initial objectives appear to have been achieved.
Let us leave to others the assessment of how humiliated America has been by its ill-considered intervention. Suffice it to say that our initial judgment of the war as a serious mistake has been largely confirmed. The Tehran regime remains standing, and while passage through the Strait of Hormuz was previously free, in the future Iran and Oman will charge approximately twenty thousand dollars per bulk carrier.
At one point, stocks began to yield more than bonds, a relationship that lasted so long it became a new normal. What has happened since the end of the pandemic and the cessation of central bank money printing (quantitative easing) is that we have returned to the old normal, where bonds yield more than stocks.
A bit of history. The conventional way of thinking about this relationship is that bonds are risk-free, while stocks are high-risk and therefore should have a higher rate of return to compensate for potential loss. Unfortunately, this is only true in an economy where inflation is contained. When inflation takes hold, bonds are uniquely vulnerable to real losses. Stocks, on the other hand, provide a degree of protection, if only because corporate profits at least keep pace with prices and often exceed them.
The British publication added, "Furthermore, we are returning to a more inflationary era in which stocks offer better protection against value erosion than bonds. The suspicion is that both are true. The strained financial condition of most advanced economies, all of which drowned themselves in debt during the zero-interest-rate period, provides another reason to avoid government bonds."
"This also explains why Trump is so eager to relieve pressure on oil prices. Lower inflation and consequently lower interest rates provide a path to reducing debt service costs. Here, the get-out-of-jail card will be artificial intelligence, which the Trump administration strongly believes will deliver a productivity miracle unseen since the Industrial Revolution. If true, this could support a magical combination of falling inflation, falling interest rates, and rising stock and bond prices."
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