Does the Oil Price Cause Inflation?
Every jump in the oil price brings the same headline: get ready for inflation. Milton Berg's answer is unusually blunt — the two have zero correlation, and the confusion between them leads central banks to watch the wrong number.
Free notes from Milton Berg's desk
Occasional free reports and market notes — straight to your inbox. No spam.
The claim
It is rare to hear a market analyst dismiss a relationship this flatly:
“Oil and inflation have zero correlation. It's a big mistake to suggest that oil prices have anything to do with inflation. Inflation is a monetary phenomenon.”
The claim sounds counterintuitive, because a petrol price is the most visible price most people meet in a week. When it rises, life is measurably more expensive. Surely that is inflation?
Berg's distinction is between a price and the price level. One thing costing more is not inflation. Inflation is everything costing more at once, and that requires something the oil market cannot supply on its own: more money.
The hundred dollars in your pocket
His illustration is domestic and hard to argue with. Suppose you have a hundred dollars to spend. You used to spend twenty of it on fuel; now fuel costs sixty. You have not been handed extra money. So you spend forty dollars less on everything else.
Multiply that across an economy and the effect is not a general rise in prices — it is a transfer. Money moves toward energy and away from restaurants, clothing, furniture, holidays. In Berg's framing: if oil prices go up and there is no money to cover it, other prices have to come down.
That is why the correlation he is denying really can be absent. An oil shock reshuffles which prices rise; only monetary expansion lifts them together.
Why this matters for the Federal Reserve
The argument has a sharp policy edge. If oil does not drive the price level, then a central bank reacting to energy prices is reacting to noise — and, worse, to something largely outside its control. Berg has made the point directly about Fed policy: oil is a political issue rather than a monetary one, and a properly run central bank should ignore it.
What it should not ignore, on this view, is the quantity of money. That is why he treats the size of the central bank's balance sheet as more consequential than the level of the policy rate. Rate changes are a blunt instrument; shrinking the balance sheet acts directly on the money supply, which is where he believes inflation is actually decided.
It also explains a prediction that otherwise looks odd: he expects the Fed to be forced into tightening and, more specifically, into quantitative tightening — because a central banker who is a monetarist by instinct will go after the quantity of money rather than the headline that annoys voters.
The investing consequence
For an investor the practical value here is defensive. A great deal of market commentary is built on the assumed chain: oil rises, therefore inflation, therefore rates, therefore sell. If the first link is weak, the whole chain is decorative — and acting on it means trading on a story rather than on evidence.
This is the same discipline that runs through all of Berg's work: distrust the plausible narrative, and ask what the data has actually done. It is why his models are built from measurable market behavior rather than from economic storytelling, and why they stay silent until the readings themselves are extreme. If you want the mechanics of that, we take them apart in what turning point analysis actually is.
Watch the full conversation
The exchange on oil and inflation comes about an hour into Milton Berg's August 2026 interview with Jack Farley on Monetary Matters.
Frequently asked questions
Does the oil price cause inflation?
Milton Berg says no: “Oil and inflation have zero correlation.” His argument is that inflation is a monetary phenomenon — a general rise in prices requires an increase in the quantity of money. Without it, a higher oil price simply forces spending away from other goods, so those prices fall rather than the whole price level rising.
If oil doesn't cause inflation, what does?
In Berg's framing, money does. That is why he regards the central bank's balance sheet as more important than the level of interest rates: rate changes are a blunt tool, while shrinking the balance sheet acts directly on the money supply.
Should the Federal Reserve react to energy prices?
On Berg's view, no — he treats oil as a political rather than a monetary variable and argues a properly run central bank should ignore it and attend to the quantity of money instead.
This article draws on Milton Berg's August 2026 interview with Jack Farley on Monetary Matters, and on his July 2026 interview with David Lin. Quotations are Berg's own words.
MB Edge publishes a long term hypothetical model. Any model performance referenced in this article is hypothetical and backtested, does not represent actual trading in any client account, and is not a guarantee of future results. This article is educational commentary only — it is not individualized investment advice or a recommendation to buy or sell any security.
Read the full disclaimers