Russia’s status as a major commodity producer could mean higher inflation ahead, with gas prices rising to $4 a gallon.
One peripheral casualty of Russia’s Ukraine invasion could be the U.S. economy. Russia doesn’t have much direct influence on the U.S. financially, as business and investment ties between the economies aren’t large.
But Russia — and Ukraine to some extent — is a major producer of commodities. So a drop in supply of those commodities could worsen U.S. inflation. Already, consumer prices soared 7.5% in the 12 months through January. If inflation does increase, that could require more aggressiveness by the Federal Reserve in raising interest rates.
Uncertainty among businesses and consumers also is likely to result from the war, and that’s not good for the economy. “We don’t know where we’re going. It’s the uncertainty that’s hard,” Diane Swonk, chief economist at accounting/consulting firm Grant Thornton, told the Los Angeles Times.
If this uncertainty puts a dent in economic growth, that could force the Fed to slow its rate hikes.
Oil Price Spike
As for commodities, Russia produces about 10 million barrels of oil per day, equaling about 10% of global consumption. Some analysts say oil prices could soar to $120 a barrel thanks to the Russia-Ukraine conflict. Global benchmark Brent crude recently traded at $103.31, up 7% from Wednesday and 10% from a week ago.
A move to $120 would cause an increase in U.S. gasoline prices to about $4 a gallon, Patrick De Haan, head of petroleum analysis at GasBuddy, told The New York Times. The average U.S. gas price stood at $3.54 Thursday, according to AAA (American Automobile Association).
A $120 oil price by month-end also could mean inflation hitting about 9%, rather than the current forecast for a peak of about 8%, Alan Detmeister, an economist at UBS, told The New York Times.
As for other commodities, Russia is the world’s biggest wheat exporter. It’s also a major producer of metals such as palladium, aluminum and nickel. Meanwhile, Ukraine provides a lot of uranium, titanium and steel. So there are plenty of areas where the war could push prices upward.
Cyberattacks
Russia also might be tempted to launch cyberattacks against the U.S., as it has done before, causing significant, temporary damage to our infrastructure. Fed Chairman Jerome Powell has expressed concern about the possibility of a cyberattack against the financial system.
Like always in bouts of economic turmoil, the least wealthy are the most vulnerable. “The average American household is going to bear the burden of Vladimir Putin’s invasion of Ukraine,” Joe Brusuelas, chief economist of accounting/consulting firm RSM, told CNN.
The effect could be as much psychological as anything. “The hit would be easily absorbed, but it would make consumers even more miserable, and we have to assume that a war in Europe would depress confidence directly, too,” Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, wrote in a commentary cited by The New York Times.
To be sure, not everyone thinks the war will have a major impact on the U.S. economy. “In most cases, the economic impact on countries beyond Russia and Ukraine is likely to be limited,” Neil Shearing, global chief economist at Capital Economics in London, wrote in a commentary cited by MarketWatch.
