Energy market moves in a strengthening economy

By Joe Aylott, Multi-Asset Strategist

• Our decision-making framework accounts for temporary volatility, preventing over‑reaction to short‑term market noise.
• High‑frequency data supports our analysis and provides early signals on how the economy is adjusting.
•  The global economy enters this period from a position of strength, from both a growth and inflation perspective.

Just over two weeks ago, the situation in the Middle East began to escalate. As with all conflicts, our thoughts are with those affected.

Oil prices have since been volatile, reacting to shifting geopolitical tensions and supply route uncertainties. In this CIO Weekly we assess the potential impact of these market moves on the outlook for growth and inflation. 

Economic growth is the primary driver of financial asset returns as it has a direct influence on corporate earnings. Our investment framework tracks momentum in global growth by combining leading economic indicators.

Before the latest escalation in the Middle East, our analysis indicated that the global economy had experienced a favourable regime shift. For much of 2025 our models had characterised the global economy as undergoing a period of ‘slowdown’ – it continued to grow, but at a slowing pace. In late 2025, because of stronger economic data, we upgraded our view to ‘expansion’ – solid, steady growth.

When escalating events in the Middle East created oil price volatility, this stronger economic momentum partially insulated the economy.

Oil price spikes typically influence growth through the following mechanism: Energy prices move higher, firms face higher costs, real wages (accounting for inflation) fall, and household purchasing power drops. This results in weaker consumption and slower economic growth.

This pattern was evident in 2022, at the beginning of the conflict in Ukraine. Inflation surged, while wage growth lagged, producing deeply negative real wage growth.

Today, the starting point for the global economy is much more favourable. With nominal US wage growth around 4%, inflation below 3%, and real wage growth slightly positive, households are not typically experiencing the pressure on income they faced during the energy-driven price spike in 2022.

Long-term economic growth is central to our investment analysis, and we don’t make knee-jerk investment decisions based on day-to-day market moves.

However, given the abrupt nature of geopolitical surprises, in turbulent periods we supplement our usual long-term data (often available monthly) with additional, high‑frequency data. This can provide early clues on shifts in a wide range of areas, from consumption and mobility to labour markets and shipping activity. It includes looking at restaurant bookings, airline passenger numbers and daily job postings.

Our views on the economic growth outlook have not materially changed following this additional analysis. The starting point matters, and the global economy was in a healthy position ahead of the Middle East escalation.

It’s our view that the transition to a period of economic expansion in recent months has created a buffer which could help the global economy weather a period of geopolitical unrest more effectively.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Oil prices feed rapidly into headline inflation, but the pass‑through to ‘core’ inflation – which strips out more volatile components such as energy and food – is typically smaller, inconsistent and often temporary. This is why our framework places greater weight on core inflation measures, treating headline inflation as an early but noisy signal.

Inflation influences financial asset returns in a more nuanced way than economic growth because its impact depends on the underlying drivers.

Our analysis distinguishes between two environments: ‘high and rising’ inflation, and ‘benign’ inflation. We also consider both the general level of inflation and the extent to which it changes, tracking deviations from long-term norms rather than reacting to short-term fluctuations.

Another important consideration is the source of the inflation – whether it’s ‘cost push’ (increased costs) or ‘demand pull’ (higher demand). Cost push is usually more problematic and is most typically associated with oil price spikes.

In 2022, core US inflation (measured by the Consumer Price Index, or CPI) was 6% and increasing, even before events unfolded in Ukraine. This meant the economy was already approaching a ‘high and rising’ inflation regime. Inflationary pressures had already intensified due to the Covid-19 pandemic, supply chain stresses, surging demand for goods and extremely tight employment markets. 

Today’s inflation backdrop is materially more benign. US CPI numbers released last week showed that core inflation is 2.5% and has been trending downwards. While the supply of oil from the Middle East has been impacted, we have not seen wider disruptions concurrently in other global supply chains. This lessens the extent to which the oil price alone could impact inflation.

The Federal Reserve Bank of Dallas estimates that a 10% oil price increase could lead to a rise of just 0.15% in headline inflation, and 0.06% in core inflation. Today’s relatively modest core CPI level – 2.5% – creates a significant margin before inflation could become problematic for financial markets. Such a margin did not exist in 2022.

Assuming we held the Dallas Fed’s estimate of how the oil price would impact inflation as a constant, oil would have to more than double from today’s levels, and stay there for some time, to cause serious inflationary concern.

There are other factors that would need to materialise to make us more concerned about the oil price impacting inflation and growth. These include signs of a more sustained disruption in the oil market than we currently anticipate, and indications in the high-frequency data of the Middle East situation affecting discretionary spending (how people allocate the portion of their income not required for essential costs). For now, we do not see sufficient evidence of either.

To summarise, escalating events in the Middle East have impacted oil prices, but the global economy is considerably stronger than it was during the energy spike in 2022.

Growth momentum has recently accelerated, improving resilience, and inflationary pressures remain benign.

Taken together, we believe this gives the global economy much more capacity to withstand surprises.

We therefore remain well positioned for economic growth. We are overweight equities relative to developed market government bonds, while keeping our investments diversified through a suite of assets including liquid alternatives and gold.

The above article has been written and published by Coutts Crown Dependencies investment provider, Coutts.