Opinion: What could Russia’s invasion of Ukraine mean for the US economic recovery?

Worse, there is a growing threat that rising inflation will outpace the nation’s strong economic recovery, leading to a recession.

Inflation is as high as it has been for nearly 40 years. Due to soaring prices, the typical American household, which makes less than $ 70,000 a year, has to spend about $ 275 more a month, or $ 3,330 a year, to buy the same goods and services they did last year, according to my own analysis.

The rise in higher inflation is the pandemic and severe disruption it has caused to global supply chains and the workforce, with millions of people falling ill and unable to work or afraid to go to work. And as the pandemic fades, so will high inflation. But that won’t happen next month or even this summer. It will not be easy to dismantle the global economic turmoil created by the pandemic, and it will take several years to see inflation return to a level we are comfortable with.

Russia’s invasion of Ukraine further complicates matters by ensuring that the pain of inflation worsens and lasts even longer. Global oil prices have risen dramatically since the invasion began above $ 110 a barrel. Although global supplies have not been significantly disrupted by the Russian invasion, there is a significant threat that they will be. The higher prices we see are first-class oil traders who add to oil prices to offset this risk. If supplies are significantly disrupted, then we could see oil prices rise to more than $ 140 a barrel and gas prices rise to more than $ 5 a gallon.

But even if we assume that there are no supply disruptions and oil settles at nearly $ 100 a barrel, then American consumers will still pay more than $ 4 a gallon of ordinary unleaded until this spring, in my own estimation. If maintained, $ 100 a barrel of oil will eventually add up to half a percentage point to annual consumer price inflation, based on simulations of Moody’s Analytics model for the global economy, which takes into account the impact of higher oil prices on production and transport of goods. That would cost American households another $ 50 a month in higher gas bills.

It is also worrying that oil and gasoline prices play a huge role in shaping the inflation expectations of global investors, businesses and consumers. Most of us buy gas regularly and see the price every day as we go and go to work. Nothing affects people’s thinking about future inflation more than what they pay the pump today.

If inflation expectations start to rise, then the Federal Reserve is likely to feel forced to raise interest rates more aggressively. The Fed knows that if inflation expectations rise, it could ignite a so-called wage and price spiral. That is, workers will require their employers to pay them more to compensate for the expected increase in their cost of living, businesses will agree to do so because they will feel they can pass on higher costs to their customers, and so on. becomes.

The economy is recovering fast.  But we must ensure that it works for everyoneThe last time this happened was in the 1970s and early 1980s, it ended very badly, with a weakened economy suffering from double-digit inflation – or stagflation. The only way to break the wage and price spiral was for the Fed to raise interest rates and push the economy into recession. Even before the Russian invasion, global investors expected the Fed to raise interest rates to seven times this year in a bid to stem inflation. This would be difficult for the economy to adjust to, but it is feasible. However, if the Fed raises interest rates even more than that, it will significantly increase the chances of economic recovery slowing. President Biden has ordered the release of National Strategic Oil Reserve (SPR) oil to help curb higher oil prices. Allies in Europe and Asia are taking similar actions that will provide an additional 60 million barrels on world markets. While this is the right thing to do, as the SPR is supposed to be used in crises like the current one, it is too small to affect prices. The world consumes about 100 million barrels of oil a day. Criticism that the administration’s efforts to tackle the threat posed by climate change are contributing significantly to higher oil prices is ominous. Of course, the administration is working to make fossil fuel production less economically attractive and more green energy investment, but this will continue for years and decades.

Russia’s invasion of Ukraine is painful to watch, as it inflicts enormous damage on the Ukrainian people. Let’s hope that there is a solution in their favor soon. It is also crucial to ensure that our high inflation recedes and that economic recovery remains intact.