Russia’s invasion of Ukraine and the resulting sanctions against Moscow are contributing to global price hikes that Americans are feeling throughout the economy, particularly at the grocery store and at the gas pump.
Russia’s status as a major exporter of commodities, particularly oil and natural gas, coupled with Ukraine’s position as a major agricultural supplier to regions such as Africa and the Middle East, make the conflict between the two countries a flashpoint for commodity prices, which it already was due to of the pandemic on the rise.
“These countries export a lot of commodities,” said William Reinsch, a former undersecretary for trade who now works as an international business analyst at the Center for Strategic and International Studies. “They usually have a world prize. So for Americans, when supply is tight, the effect is that the price is going up, because it’s going up everywhere.”
New Consumer Price Index (CPI) data to be released by the Labor Department on Tuesday is likely to show another sharp rise in both monthly and annual inflation. Consumer prices rose 7.9 percent in the year ended February and signs of high inflation were mounting in March.
On Friday, the United Nations’ Food and Agriculture Organization (FAO) saw its reference food price index rise 12.6 percent from February to March, an increase it described as a “huge jump”. The March numbers represent all-time highs for grains, vegetable oils and meats, while the sugar and dairy sectors also posted big gains.
Notably, the FAO grain price index rose 17.1 percent from February to March, marking its highest level since 1990. The rise was “largely driven by conflict-related export disruptions from Ukraine and, to a lesser extent, the Russian Federation.” according to an assessment by the FAO.
The global numbers are consistent with the situation in the United States, where food prices rose 7.9 percent year-on-year in February, according to consumer data from the US Bureau of Labor Statistics, the largest 12-month rise since July 1981. The February Food-at -Home Index, which takes into account prices for domestic food preparation, rose nearly 9 percent over the same period, while wholesale prices of goods rose 2.4 percent in February, the largest increase since the data was first calculated in March year 2009 .
The war in Ukraine also accelerated a steady rise in oil prices, largely driven by the recovery from the pandemic. Heating oil prices rose 6.7 percent and gas prices 6.6 percent in February alone, according to the CPI, as crude prices rose to $100 a barrel.
The price of a barrel of West Texas Intermediate crude peaked near $130 on March 8 before falling to around $94 on Monday, but gasoline prices haven’t fallen nearly as fast. A gallon of regular unleaded gasoline costs about $4.10 according to the national AAA average, just 20 cents less than a month ago.
While inflation-adjusted gas prices are still below post-Great Recession highs, higher energy costs may hit consumers harder than inflation elsewhere. Higher gas prices are not only difficult for drivers to avoid, but can also increase the cost of transporting store-bought goods.
Aside from the cumulative effects of rising commodity prices, which affect the economy and can amplify as they work their way up global manufacturing pipelines, Russia produces certain commodities that US companies, and by extension the country’s consumers, use directly.
“Palladium, vanadium and titanium are three such commodities,” Reinsch said.
Palladium is a component of catalytic converters that convert toxic gases produced by internal combustion engines into less toxic pollutants. Vanadium is added to steel to make it stronger, and titanium has numerous uses, including aircraft shells.
“There are others who make these products,” Reinsch said. “But again, these are supply chain disruptions and we have to scramble to find them in other places.”
finger pointing
As more Americans feel the sting of inflation, the price surge has become a key campaign issue ahead of the 2022 midterm elections, with Republicans and Democrats taking turns blaming the upward trend in costs.
Republicans have blamed rising inflation on Democrat-backed policies, including America’s $1.9 trillion bailout plan that President Biden signed into law in March 2021, about a year after former President Trump signed one signed bipartisan $2 trillion coronavirus relief package.
A number of Democrats have again blamed corporations and market concentration, accusing larger companies of exploiting economic conditions to raise costs.
In contrast, experts have pointed to a combination of factors that contributed to the higher price stickers.
“Part of this is supply chain disruptions due to the pandemic. We can’t get the goods we used to have, like computer chips and so on,” Desmond Lachman, senior fellow at the American Enterprise Institute, told The Hill.
“But it was also the case that fiscal policy was too loose and monetary policy was too loose. So we all had three things pushing in the same direction,” he said.
Ben Page, a senior fellow at the Urban-Brookings Tax Policy Center, also told The Hill that fiscal stimulus has contributed to inflation, but added he wouldn’t call it the “root cause of most inflation”.
“I think the way you can see that it’s not just being driven by US politics is that it’s not just a US phenomenon,” Page said. “The increased inflation is something we’ve seen around the world, or certainly in the developed world.”
In recent weeks, countries like China, Egypt and France have seen rising inflation rates, a trend experts say is being exacerbated by the ongoing war between Russia and Ukraine.
Sanctions work
The US has joined its allies in unleashing a spate of sanctions on Russia in response to its invasion of Ukraine.
Rachel Ziemba, Adjunct Senior Fellow at the Center for a New American Security, told The Hill many of the sanctions are aimed at increasing costs for Russia and limiting its government’s access to the global financial system.
“So they limit their bank’s ability to the government’s ability to use global banks,” Ziemba continued. “And the sanctions program was designed to try to take advantage of the areas of asymmetry that would hurt Russia more than the US and Europe.”
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On the other hand, Ziemba said some of the impact the US has seen as a result of the sanctions has been “kind of indirect” while Russia faces more payment challenges.
“The other problem, of course, is that the Biden administration is trying to do everything in its power to mitigate some of those costs. The challenges are that we’re in a tight market … and I think one of the challenges will be that a number of producers, especially in oil and gas, are not making decisions quickly to change their production,” Ziemba said.
“I think that’s where the debates are happening with countries like Saudi Arabia and the United Arab Emirates [United Arab Emirates] Reluctant to deviate from their go-slow policy on additional shipments have been disappointing for the administration,” she added.