The current oil and commodity price shock has created an interesting pattern: The futures curve has moved further into backwardation, and market participants are shrugging off the headlines, discounting a short-term inflationary burst that would be rapidly corrected.

We should expect disinflationary pressures to dominate after the current energy shock, rather than a prolonged inflation crisis. The mix of a backwardated oil curve, a shrinking money supply, slow money movement, and a strong US dollar suggests that once the temporary rise in crude prices goes away, we should see lower, not higher, overall inflation.

Recent geopolitical tensions have pushed crude above $100 per barrel (Brent), reviving fears of a new inflation wave. However, the structure of the oil market shows that this is being priced as a short‑lived supply disruption, driven by a geopolitical risk and scarcity premium in the front end, not a persistent shock.

Oil futures for WTI and Brent are now in steep backwardation. Front‑month contracts are showing a $95–100 per barrel spot price, while long‑dated contracts trade closer to $60, implying lower prices later in the decade.

Backwardation implies that markets expect tightness today but a much looser supply-demand balance ahead, so the impact on headline CPI from oil should be front-loaded and self-correcting as high prices curb demand and incentivize non-OPEC and diversified supply. In other words, you may see a short‑term rise in CPI from energy, but it is inconsistent with a persistent inflation burst when the forward curve indicates declining prices.

Inflation is always a monetary phenomenon, driven by the combination of rising money supply and higher money velocity. In the United States, broad money growth has fallen dramatically, with M2 declining for more than a year on a year‑over‑year basis and falling by more than 6% at the trough. This reversal follows the extraordinary monetary expansion of 2020–2021 and is now acting as a powerful limiting factor on nominal spending, helped by the decline in federal government spending. Considering that federal spending has been the largest contributor to the inflationary burst of 2021–2023, a moderate control over government outlays supports a slowdown in inflation.

At the same time, money velocity remains weak despite a modest rebound since 2021. Recent estimates place US M2 velocity around 1.12–1.40, still well below pre‑2008 levels, which were closer to 1.7–2.0. A reduction in the money stock combined with weak velocity is incompatible with a persistent inflation crisis. Furthermore, it points to disinflation and, in some segments, deflation once the temporary shock ends.

The strong US dollar is another relevant disinflationary force. A rising dollar reduces the local‑currency cost of imported goods and commodities, offsetting part of the rise in dollar‑denominated oil prices for US consumers and businesses. This element is particularly important when global growth is slowing and other major economies face weaker demand, as suggested by estimates for global GDP decelerating from around 3.3% in 2024 to below 3% for 2026.

Another relevant factor to consider is the slack, overcapacity, and working capital challenges that exporters are facing. As global demand growth cools off, exporters need to reduce prices to limit their working capital challenges and overcapacity costs.

In such an environment, foreign producers have limited pricing power, and the US dollar’s strength allows the transfer of external weakness to moderate import prices and tighter financial conditions abroad. Thus, the result is an external deflationary impulse that adds to the internal cooling factor from contracting money and weak credit growth. 

The current energy shock comes entirely from a geopolitical risk premium added to commodities, not from a supply challenge. However, wars tend to be deflationary after the initial price spike, as the 2022 Ukraine war proved. Households and businesses respond to global uncertainty by cutting credit-driven consumption, postponing leveraged investment projects, and building precautionary savings. Ultimately, this prudent approach cools demand for discretionary goods, housing, and long‑duration assets, and lower credit demand reduces money supply growth, so prices in many segments where supply is not an issue tend to adjust quickly once the initial shock ends.

History suggests that after the first inflationary wave tied to perceived supply disruptions and geopolitical risk premiums, the combination of tighter financial conditions, prudent credit demand, higher risk aversion, and ample supply is what generates a rapid disinflation. As credit growth slows and balance‑sheet control becomes the priority, the underlying trend is closer to disinflation than to persistent inflation, especially when neither monetary nor fiscal policy are expansionary. 

The past two decades show several examples where large energy shocks did not produce lasting inflation crises. The 2008 oil spike above $140 per barrel (approximately $211 in today’s dollars) caused a sharp tightening of financial conditions, followed by a collapse in demand and deflationary pressure during the global financial crisis. Although a financial crisis is significantly less likely and the specific figures are different, the pattern of surging oil followed by rapid disinflation as demand slows down and credit contracts is very similar to the current environment of tighter money and weak global demand, elements that were already evident in 2025.

The Ukraine war also showed that the energy spike in 2022 was short-lived even as the war continued, as diversified supply eliminated the geopolitical risk and energy demand moderated. These temporary shocks are not limited to 2008 and 2022. We have seen similar patterns in 2011, 2014, and 2018.

The current oil backwardation, declining money-supply growth, and low velocity suggest a similar pattern: a temporary CPI increase from energy, followed by disinflation and pockets of outright deflation as supply normalizes and the price risk premium falls, rather than a persistent inflation crisis.

We must also remember that oil prices today are far away from 2008 levels. The equivalent of $140 a barrel in 2008 would be $211 today. As OPEC members often note in their Vienna meetings, oil prices in real terms are significantly lower than what headlines suggest. Furthermore, today’s energy crisis is very different from 2008. In 2008, the US pumped around 5 million barrels a day of oil; today it’s 13.8 mb/d. US natural gas output has doubled to over 1,000 bcm a year. The US is structurally less exposed to energy shocks, becoming more of a shock absorber for the rest of the world.