①The Iran war and the resulting oil crisis will have long-term impacts on the global economy, yet stock markets continue to hover near historical highs; ②This disconnect is highly evident, with Bank of America noting that expectations of AI-driven deflation may be limiting prospects for long-term price increases.
Since the outbreak of hostilities between the U.S. and Iran on February 28 and the subsequent surge in oil prices, concerns about a resurgence of inflation have persisted. However, the U.S. stock market has repeatedly reached new highs. Why are investors seemingly unfazed by inflation fears? According to Bank of America (BofA), artificial intelligence (AI) might explain this phenomenon.
The war in Iran and the resulting oil crisis will have long-term impacts on the global economy, yet stock markets continue to hover near historic highs. This disconnect is highly evident, and Bank of America has noted that expectations of artificial intelligence driving deflation may be limiting the outlook for prolonged price increases.
Aditya Bhave, an economist at Bank of America, wrote in a recent report: 'Despite tariffs and the Iran war, long-term inflation expectations have remained relatively moderate.'
'We believe this is because the market anticipates significant deflationary effects from artificial intelligence in the coming years,' he added.
Many Wall Street professionals believe that artificial intelligence will trigger significant deflationary pressures while driving substantial productivity gains. This combination is often described as 'supply-side-driven deflation' or 'productivity-driven benign disinflation,' rather than traditional demand-contraction deflation.
Since Trump announced the initial ceasefire on April 7, the U.S. stock market has repeatedly set new record highs. Despite oil prices still being far above pre-war levels, U.S. equity investors appear to have already concluded that the Iran war has ended.
Mohamed El-Erian, renowned economist and Chief Economic Advisor at Allianz, recently warned that although the U.S.-Iran conflict has reached a stalemate, this does not eliminate the impact of the war on the global economy.
He pointed out, 'What initially appeared as a narrow price shock (energy and borrowing costs) has now evolved into a broader inflationary phenomenon. Meanwhile, signs of demand contraction (slower growth) are also beginning to emerge.'
So why does the market seem unaffected?
In fact, according to Bank of America, long-term inflation expectations have been on a downward trend since the end of 2023. The bank attributes this decline to expectations of AI-driven deflation.
Bank of America analysts wrote, 'The impact brought by artificial intelligence is difficult to predict, but it is reasonable to expect that its influence will surpass the current supply chain disruptions within the next five to ten years.'
However, at the same time, Bhave pointed out that inflation expectations are relatively high in the short term, which could complicate the Federal Reserve's prospects for interest rate cuts as well as market expectations for further reductions. He emphasized that persistently escalating inflation concerns will worry the Federal Reserve.
Editor/Joe