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High Oil Prices May Push Inflation Lower Over Time

BY | ETF Database
9:55 am ET 10/19/26 | 3 VIEWS
Rising oil prices are usually seen as an inflation warning. Yet Thornburg Investment Management argues the longer prices stay high, the more likely they are to pull inflation down.Key Takeaways: U.S. households spend about 3-4% of their budgets on energy, but indirect costs widen the hit. Oil shocks in the 1970s and 2008 were followed by Fed rate hikes and, later, rate cuts. Thornburg’s THOR held 9.5% in technology and 1.2% in consumer discretionary, as of Sept. 30 compared with 31.8% and 8.4% for its benchmark. Energy costs ripple through transportation, manufacturing, and consumer goods, lifting the Consumer Price Index. Thornburg Portfolio Manager Lei Wang and Portfolio Specialist Kevin Endo acknowledge that bump in their report, “A Disinflationary Paradox of High Oil Prices.” Over time, though, persistent high oil prices “function as a stealth tax on the real economy, eroding disposable income, curbing aggregate demand, and sowing the seeds of slower growth or outright recession,” they wrote. Instead of locking in inflation, high oil prices tend to create “the conditions for its eventual collapse.” The strain goes beyond the gas pump, according to the report. U.S. households spend roughly 3-4% of their budgets directly on energy. Higher food and goods prices add to the hit, while rising costs squeeze business margins and hiring. See more: Fed Hike Puts Bond Investors at a Crossroads Wang and Endo compared the effect to an inverted yield curve, a common recession signal. “The longer either persists, the greater the cumulative stress on households and businesses, and the higher the probability that ‘something breaks,’” they wrote. Oil prices more than doubled during the 1979-1980 Iranian Revolution after global production fell about 4%, according to the report. In that episode, the 1973-1974 OPEC embargo, and the 2008 spike, the Federal Reserve followed a “hike then cut” pattern.What Prolonged High Oil Prices Mean for PortfoliosCyclical stocks and energy-exposed names face headwinds as demand weakens, the authors wrote. Meanwhile, defensive sectors such as utilities, consumer staples, and healthcare, along with quality fixed income, warrant overweight positions. One of the firm’s newer funds held less in consumer-sensitive stocks than its benchmark. The Thornburg Premium Income Builder ETF (THOR) held 1.2% in consumer discretionary stocks as of Sept. 30, according to Thornburg. The MSCI World Index, its benchmark, had 8.4% in the sector. The fund also held more than the index in utilities and consumer staples, the firm said. Financials were its largest sector at 23.2%, while energy made up 7.1%, above the benchmark’s 4%. Technology showed the widest gap, at 9.5% of THOR versus 31.8% of the index. The fund traded at 12.2 times next year’s expected earnings, versus 18.6 times for the index, Thornburg data shows. THOR, which launched in June 2026, invests in dividend-paying stocks worldwide, according to Thornburg. Co-Managers Matt Burdett and Brian McMahon add a “selective, actively managed options overlay” meant to boost income. That overlay is designed to retain “meaningful participation in long-term equity market returns.” Its largest stock holdings as of Oct. 19 included French telecom company Orange S.A. (ORA), Huggies maker Kimberly-Clark Corp. (KMB) and Italian utility Enel SpA (ENEL), according to the firm. For more news, information, and analysis, visit our Portfolio Strategies Content Hub.

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