Chart of the Day: Oil’s Substitution Effects, Illustrated

Since the outbreak of war with Iran in late February, spiking oil prices have spurred broad-based fears of inflation possibly resurging. We have long argued, however, that absent rapid money supply growth to drive prices broadly higher economywide, elevated oil and gas prices are much more likely to cause substitution. For discretionary items—especially some of life’s luxuries—consumers are likelier to delay, defer or downsize consumption.

This is the scenario we see today. US M4 money supply grew 5.9% y/y in April—a tame rate in line with prepandemic trends.^[i] That was a low inflation period. Europe’s rates are slower still.

And markets seem to be pre-pricing at least some substitution ahead. Our Chart of the Day illustrates just that, plotting the rolling 13-week correlation coefficient between the MSCI World Textiles, Apparel and Luxury Goods Industry’s weekly percentage change and Brent crude oil’s. For the uninitiated, correlation coefficients measure the relationship between two variables’ movements. A 1.00 correlation shows the two move in lockstep: When X rises, Y rises, too. A -1.00 correlation shows the two moving exactly opposite. When X rises, Y falls.

These relationships aren’t fixed and will vary with outside influences … like a war. As our chart displays, the correlation coefficient between this highly discretionary industry and oil prices has absolutely plunged since war broke out, sitting at -0.93 presently. In our view, this looks like the stock market pre-pricing the effect of substitution on demand for the category’s goods. It illustrates how high and rising oil prices can be offset elsewhere by consumer behavior. And why, therefore, oil alone doesn’t dictate inflation trends.

Exhibit 1: The Market Pre-Prices the Substitution Effect

Source: FactSet, as of 6/3/2026. Rolling 13-week correlation coefficient of MSCI World Textile, Apparel and Luxury Goods Industry price-level percentage change and Brent crude oil percentage change, weekly, 3/28/2025 – 5/29/2026.