It’s The Oil, Stupid.

What matters from here, of course, is the outlook for inflation. Clients tell me that strategists fall into one of two camps — those who believe faster wage growth and the revival of the Phillips Curve is just around the corner, and those who have completely given up: they see no reason to look for higher inflation and they therefore have no reason to expect the range in bond yields to break. The ranks of the latter camp have grown dangerously large and this is now the consensus view.

That’s from SocGen’s Kit Juckes, and the “dangerously large” bit suggests a lot of folks may end up getting caught behind the curve (figuratively and literally in this case), a scenario which Juckes’ colleague Albert Edwards believes might ultimately translate into a nasty correction in equities. You can read more on that here.

But if you’re Deutsche Bank, you’re not buying the idea that there’s a real-wage growth “puzzle.” Because if you’re Deutsche Bank, what you’ve done is corrected for an improperly measured unemployment gap. I’m not going to bore you with that, but suffice to say the bank thinks the unemployment rate is not the best way to measure slack in the labor market and once you “correct” for that and assume a lag between labor market tightness and an uptick in wage growth, the fit is better.

The interesting part comes when Deutsche takes their modified model (they use the part-time rate with a quarter lead) and deflates it. Have a look at this:

The upshot, from DB, is this: “there is no real-wage puzzle [and] the debate is mostly about the ~30bp decline in inflation expectations.” That, in turn, can pretty plausibly (actually it’s intuitive) be explained by crude. To wit:

This decline can reasonably be attributed to the positive supply shock to oil prices (60%+ decline from mid-14 to mid-16). This interpretation would be consistent with several factors: (a) the timing of the drop in inflation expectations (Q1-15), (b) the fact that neither the predicted end of cycle nor the expected pick-up in inflation occurred and (c) the relative outperformance of Europe (which benefits more than the US).

One obvious takeaway there is that because, as DB goes on to write, “a positive supply shock does not generate self-reinforcing dynamics of weaker growth and lower inflation,” the downward pressure on inflation expectations could evaporate quickly. But the real kicker from the note excerpted above is the following chart which certainly seems to suggest that oil’s impact on inflation expectations has served to enable ECB easing:

So you know, you can look at this one of two ways in the context of the recent rise in crude prices: 1) it will provide the impetus for central banks to finally move forward with normalization thereby replenishing their ammo for the next downturn, or 2) it will catch central banks behind the curve and force them to tighten more aggressively than the market anticipates thereby accelerating the timetable on that same inevitable downturn.

Those two points are not mutually exclusive.