Inflation Will Rise, But Ukraine Conflict Likely Won’t Halt U.S. Economic Growth


People queue outside a branch of Russia’s state-owned bank Sberbank to withdraw their savings and close their accounts in Prague on February 25, 2022, before Sberbank closes all of its branches in the Czech Republic later in the day.

Michal Cizek | AFP | Getty Images

Food and gasoline will likely cost more, and the supply chain issues that have plagued the economy for the past two years will likely persist, if not intensify.

But could the Russian-Ukrainian conflict somehow tip the US economy into recession? It seems unlikely at this point, although anything is possible.

“What we’ve seen is that oil prices have gone up and stock prices have at least initially pulled back on all of this. Together, it’s a soft, light, stagflationary blow to the economy,” said Wells Fargo chief economist Jay Bryson. “It’s going to push inflation higher than it is and it’s probably going to slow growth. But it’s probably not enough to push the economy into recession.”

This view is consistent with most Wall Street economists.

However, at a time when inflation is at its highest level since the early 1980s, the last thing consumers need is more price pressure. Grain and energy commodity prices have catapulted higher in recent weeks, pushing West Texas Intermediate prices up about 22% in 2022 and wheat into double digits before pulling back sharply on Friday.

The importance of the two countries as agricultural exporters and producers of essential elements for the manufacture of semiconductors will have an economic impact. But the implications are unlikely to be major for a global economy that is still in a rebound phase from the depths of the pandemic.

“Rising gas prices will affect consumer confidence. Does that mean the consumer is going to lock in spending? Probably not,” Bryson said. “Given the fact that the omicron is pulling back and things are opening up, I think that’s a countervailing force.”

Two relatively small economies

Neither country is a huge economic force, despite their abundance in agricultural products and Moscow’s military power.

Russia’s total economic output is somewhat less than that of New York State, while Ukraine’s GDP is roughly the size of Nebraska’s. Together, the two countries are responsible for up to 30% of global wheat exports and 80% of global sunflower seed production, according to Capital Economics.

The tensions rattled financial markets, coming at a time when investors were already worried about policy tightening from inflation-fighting central banks, including the US Federal Reserve.

“The key effect will come from higher oil and natural gas prices,” Capital Economics forecasters said in a note to clients. “It now appears that average inflation in advanced economies could still hit 4% by December…Policymakers will weigh the upside risks to inflation against the downside risks to activity.

Markets still widely expect the Fed to start raising interest rates in March and continue to do so through 2022 and 2023. Prices have been volatile, but traders see up to seven hikes by a quarter of a percentage point this year, which would equate to one each time. meetings of the Federal Open Market Committee.

That prospect had been enough to hit equities this year and push government bond yields higher. Combining that with geopolitical unrest could create a bad mix.

“The impact via tighter financial conditions is the most unpredictable,” Goldman Sachs economists Joseph Briggs and David Mericle said in a note. “Past geopolitical risk events have only rarely been followed by a significant tightening of financial conditions in the United States, although it is difficult to generalize to the current situation. A more significant tightening of financial conditions and an increase of the uncertainty facing businesses would further weigh on U.S. growth.”

Goldman estimates that every $10 increase per barrel of oil would raise core inflation excluding food and energy by 0.035 percentage points and headline inflation by 0.2 percentage points, but only requires an impact of 0.1 percentage point on US GDP, which just had its fastest full year. growth since 1984.

“The hit to growth could be somewhat larger if geopolitical risk materially tightens financial conditions and increases uncertainty for businesses,” the economists said.

However, Goldman said he doesn’t expect events in Ukraine to deter the Fed from rising. Past crises have sometimes prompted the Fed to ease policy, but “the risk of inflation has created a stronger and more pressing reason for the Fed to tighten today than there was in past episodes” , the firm said.

Indeed, most Fed officials who spoke this week said they were monitoring events, but they did not indicate they would change their minds on tightening. Fed Governor Christopher Waller said Thursday that “a strong case can be made for a 50 basis point hike in March” if economic data continues to show a strong labor market and persistent inflation.

Richmond Fed Chairman Thomas Barkin earlier this week compared the current dispute to Russia’s 2014 annexation of Crimea and said the event had little economic impact.

“If it evolves like 2014, I don’t think you’ll see much change in the underlying logic that I talked about,” Barkin said. “But this is uncharted territory and we will have to see where the world goes.”


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