October 3, 2022

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Inflation will rise, but the conflict in Ukraine likely won’t halt US economic growth

Inflation will rise, but the conflict in Ukraine likely won't halt US economic growth

People line up outside a branch of Russia’s state-owned 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.

Michel Gizek | AFP | Getty Images

Food and gasoline will likely be more expensive, and the supply chain problems that have blighted the economy over the past two years are likely to persist or even intensify.

but it’s possible The conflict between Russia and Ukraine Somehow push 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 fallen at least initially because of all of this,” said Jay Bryson, chief economist at Wells Fargo. “Together, this has been a moderate inflationary pressure – a moderate pressure – on the economy.” “It will push inflation higher than it is, and likely slow growth. But it may not be enough to push the economy into recession.”

This view is in line with most Wall Street economists.

However, while inflation is at its highest levels since the early 1980s, the last thing consumers need is more pressure on prices. Grain and energy commodity prices have jumped higher in recent weeks, pushing up West Texas Intermediate prices around 22% in 2022 and wheat in double digits, before plummeting sharply on Friday.

The importance of the two countries as agricultural exporters and producers of essential components for semiconductor manufacturing will lead to economic losses. But the repercussions should not be great for the global economy, which is still in the process of recovering from the depths of the epidemic.

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“Gasoline prices are going up – that’s going to affect consumer confidence. Does that mean the consumer will shut down spending? Probably not,” Bryson said. “Given the fact that Omicron is receding and things are opening up, I think that’s an opposite force.”

Relatively small economy

Neither country represents a huge economic power, despite the abundance of agricultural products and the military power of Moscow.

Russia’s total economic output is slightly smaller than that of New York State, while Ukraine’s GDP is close to the size of Nebraska. 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.

her tensions turbulent financial marketscomes as they do at a time when investors were already concerned about policy tightening from Central banks that fight inflation Including the US Federal Reserve.

“The main impact will come from higher oil and natural gas prices,” Capital Economics experts said in a note to clients. “It now appears that the inflation rate in the advanced economy may remain as high as 4% by December… Policy makers will weigh the upside risks of inflation against the downside risks of activity.”

Markets still largely expect the Fed to start raising rates in March and continue to do so through 2022 and into 2023. Prices have been volatile, but traders are seeing up to seven quarter-percentage point hikes this year, which would equate to one rise in All of them have Federal Open Market Committee meetings.

That prospect was enough to hit stocks this year and push government bond yields higher. Combining that with geopolitical turmoil can make for a bad combination.

“The impact from tightening financial conditions is the most unpredictable,” Goldman Sachs economists Joseph Briggs and David Merkel said in a note. “Previous geopolitical risk events have rarely followed a significant tightening in US financial conditions, although it is difficult to generalize on the current situation. A larger tightening in financial conditions and increased uncertainty facing businesses would further pressure growth in the US .”

Goldman Sachs estimates that every $10 a barrel increase in oil will increase Core inflation excluding food and energy by 0.035 percentage points and headline inflation by 0.2 percentage points, but it imposes just 0.1 percentage point on US GDP, which is coming off the fastest full-year growth since 1984.

“The blow to growth could be somewhat greater if geopolitical risks materially tighten financial conditions and increase business uncertainty,” the economists said.

However, Goldman Sachs said it does not expect events in Ukraine to deter the Federal Reserve from taking a stroll. Previous crises at times prompted the Fed to loosen its policy, but “inflation risks have created a stronger and more compelling reason for the Fed to tighten today than in past episodes,” the company said.

In fact, most Fed officials who spoke this week said they were watching events, but they did not indicate that they would change their mind about tightening. Federal Reserve 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 President Thomas Barkin earlier this week compared the current conflict to Russia’s annexation of Crimea in 2014 and said the event had had little economic impact.

“If this develops like 2014, I don’t think you’re going to see much change in the basic reasoning that you were talking about,” Barkin said. But this is uncharted territory and we have to see where the world goes.”