Impact of Russia-Ukraine War on US Inflation

purchasing power of a consumer. It is calculated by various methods, but the most common way is by calculating the consumer price index (CPI). It is the measure of direct consumer spending on goods and services. The prices, in recent times, have exorbitantly increased as a consequence of rising demand for goods with limited supply. The pandemic has greatly contributed to supply chain shortages which has led to inflation rate being at the highest in four decades. The current inflation rate is at 7.9% as of February 2022, mainly due to a surge in the price of gas, food, and housing. This is concerning as it decreases the real value of money and as wage growth does not mirror price change, it greatly affects overall standard of living. The main recent contributor to the rising inflation and volatility in prices is the Russia-Ukraine War. Russia has attacked Ukraine with the intention of invasion and its ruthless attack has been condemned worldwide. It has disrupted global supply chains and the sanctions imposed on Russia by developed economies has intensified the blow of the impact of war. The most direct impact has been on oil and food prices.

The pandemic slowed production disrupting supply chains and the war further ruptured the recovery. Russia is one of the biggest oil and gas producers in the world and a ban on Russian imports by the US and UK has spiked prices across the world. Major oil companies like Shell and BP have joined the bandwagon and pledged to to stop buying oil from Russia, intensifying the price uncertainty. Brent crude, a major price benchmark for oil, has reached a high of $130 per barrel in March and according to AAA, gas prices have hit $4.3 per gallon. Figure 1 briefly shows the volatility.

The US doesn't import as much from Russia but disruptions in the global supply chain affects the price at home too. In today’s global economy, each country is dependent on the other to some capacity and disruptions in Russian imports have a drastic impact on European supply chains that affect the US too. With a high demand and cramped supply, prices rise. To curb the rising gasoline prices, Biden has vowed to release millions of barrels of oil from the US Strategic Petroleum Reserve and is looking at potential deals with Venezuela and Iran. But experts predict that it shall not be enough to subside the effects of the ban. This could have a two faced effect on inflation according to WSJ. This could either reduce inflation as consumer spending falls leading to reduction in ‘core inflation’, excluding volatile food and energy prices that Fed prioritizes. Or it could increase inflation as the workers may vouch for better wages, which may cause an increase in core and ‘headline’ inflation. Recent trends suggest an increase is more likely. The Fed cannot divert the impact much by policy changes as the situation is highly dependent on global events and supply chains.

One direct impact of increasing gas prices has been on the agricultural sector. Oil is a necessary raw material in production of urea and ammonia, key ingredients of a fertilizer. The shortage of oil combined with high prices, has drastically reduced the production of fertilizers. Furthermore, blockage of Russian exports, a key exporter, of fertilizer has further aggravated the problem of access. This has increased production costs for farmers and put them in a tough position. They ought to decide if they wish to reduce production or even not produce certain crops like corn as they require more fertilizer. Farmers who are choosing to buy the fertilizer at the exorbitant cost, are consequently forced to increase the selling cost. For consumers the impact is worse as they face increased prices and a looming food crisis. Russia and Ukraine export 30 percent of the world's wheat and for the foreseeable future the supply from these countries looks uncertain. Sowing for the spring season in Ukraine is more or less at a halt and with tensions among nations Russian exports are likely to decline. Though the US is not very dependent on imports for food supply, the effect of the global crisis will create shortage issues in the country too. Food prices, as of February 2022, according to the Bureau of Labour Statistics have increased by nearly 8 percent in the past few months and the war crisis will further raise prices. Moreover futures, simply a future contract set by commodity sellers to protect themselves from price changes, for most agricultural produce are high. Since February 25, wheat futures are up 29 percent, corn 15 percent, and soybeans 6 percent. This indicates the rising prices and the impact of the war on food prices.

To control the record high inflation, the Fed is implementing monetary policy. The Fed increased its benchmark interest rate for the first time since 2018. An increase in interest rate is expected to reduce consumer spending and bring inflation down. The Fed is expected to continue increasing interest rates in coming months. Experts believe that this is a slow process and may not bring relief in inflation soon as consumer demand is not getting affected by rise in prices. In respect to the war, peace talks between Russia and Ukraine have resulted in lower oil prices. Brent Crude lowered to $112.48, 6 percent lower while US marker West Texas International lowered to $105.96, 7 percent lower. As the war eases, based on past war trends, the inflation aggravated by oil and commodity prices must relax. But the future definitely seems more uncertain and if the situation worsens, then the prices may soar and no policy may be able to contain the rise. It is all in a very volatile state right now but governments are trying to stay optimistic.