BofA unpacks why AI could offset Iran war-fueled inflation
NYSE
- Markets are looking past the Iran war despite predictions that it could cause more inflation.
- AI might explain why the market is brushing off shocks from the war, Bank of America says.
- Anticipation of AI-driven disinflation could ultimately offset wartime inflationary pressures.
AI might explain why investors seem unfazed by predictions of renewed inflation due to the Iran war.
Economists have warned that the Iran war and the oil shock that it's caused will have prolonged effects on the global economy, yet the stock market continue to hover near record highs. The disconnect has been stark, but Bank of America said that expectations for AI to drive disinflation could be limiting the outlook for longer term price increases.
"Long-term inflation expectations have remained remarkably benign through tariffs and the Iran war," Bank of America economist, Aditya Bhave, wrote.
"We think this is because markets are anticipating a disinflationary AI productivity boom in coming years," he added.
The stock market has hit several fresh record highs since Trump made first announced a ceasefire on April 7.
Investors have all but determined that the war in Iran is behind them even as oil prices are still well above prewar levels. WTI oil sits at around $100 per barrel while Brent oil climbed to $111.40.
Investing legend, Mohamed El-Erian, former PIMCO CIO warned that just because the war is near a stand still on the geopolitical front, that doesn't eliminate the impact to the global economy.
"What began as a narrow price shock (energy and borrowing costs) has been transitioning into a broader inflationary phenomenon. This is occurring as signs of demand destruction (lower growth) are emerging," he wrote.
The unresolved conflict drags on and high oil prices drive inflation warnings from El-Erian and other experts, the market seems unfazed.
In fact, long term inflation expectations have been trending down since late 2023, according to Bank of America. The firm credits the decline to expectations of AI-driven disinflation.
"Timing the AI shock is difficult, but it's reasonable to expect that it will outweigh the current supply disruptions five-to-ten-years down the line," they wrote.
However, in the near term, inflation expectations are elevated, which could complicate the Federal Reserve's outlook and the market's expectation for more rate cuts.
Bank of America noted that current medium term expectations have risen. "This suggests markets are now expecting more than just a one-off adjustment in price levels from the war," the report read.
The added that that a more sustained pickup in inflation worries would worry the Fed.
from Business Insider https://ift.tt/nxHNXkZ
via IFTTT
Comments
Post a Comment