The Five Ways Oil Impacts The Global Economy | The Macro Institute

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As the U.S.'s conflict with Iran progresses into a new week, oil prices remain at the center of the conversation when it comes to the war's financial market impact. Oil prices play a huge role in the global economy, which is exactly what we will explore in this video.

Here are some key takeaways from the video...

🔹 Oil Prices Have A Huge Impact On Inflation:

Despite only making up 6% of the CPI basket, energy’s volatility makes it the main driver of trends in the index. This makes Headline CPI incredibly sensitive to changes in oil prices. It’s this relationship that ultimately leads to oil’s huge impact on the global economy.

🔹 Oil Prices Impact Central Bank Decisions:

Through its impact on inflation, a rise in oil prices typically coincides with the increased tightening of policy from central banks around the world. The opposite is true when oil prices are declining.

🔹 Oil Prices Impact Stock Market Performance:

When looking back at previous times when oil prices spiked over 100%, a pattern emerges where the S&P 500 falls alongside the price shock. Each of these episodes is unique, so it is difficult to draw definitive conclusions from these periods.

🔹 Oil Prices Impact GDP Growth:

In consumption heavy economies, such as the U.S., real GDP growth tends to be lower during years when consumers are forced to spend a larger proportion of their annual consumption on food and energy.

🔹 Oil Prices Impact Sector Outperformance:

Increased oil price volatility tends to coincide with increased stock market volatility. Plus, sustained swings in oil prices can have a large impact on which sectors outperform their index.

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