Russia’s attack on Ukraine comes at a vulnerable time for economies around the world. Inflation is already at a worrisome level, consumers are paying more for basic goods across the board, and the global supply chain is still recovering from pandemic disruptions.
The invasion, which has upended geopolitics and threatens a humanitarian crisis in Ukraine, sent stocks tumbling and oil prices rising on Thursday. Here, we answer some questions on how this might continue to play out for the economy and what this means for consumers in the U.S. and California.
Will food and gas prices in the U.S. rise?
Russia and Ukraine are major producers of a range of commodities — oil, natural gas, grains, metals — whose prices rise when facing big global events such as war. Those higher prices eventually ripple to local grocery stores and the gas pump, and this conflict is no different.
“It is the American middle and working classes that will bear the burden of adjustment caused by another European war,” said Joseph Brusuelas, chief economist at the accounting firm RSM.
The U.S. imports relatively little from Russia directly, but what happens there and in Europe has wide knock-on effects.
Russia is the world’s second-biggest natural gas producer, behind the U.S., and it is among the top three in oil production, along with the U.S. and Saudi Arabia, supplying about 10% of what’s consumed worldwide. (Higher oil prices in global markets translate directly to higher prices at your gas station — gasoline is one of many products made from crude oil.)
Russia is also a major producer of wheat, palladium — used in catalytic converters to clean car exhaust fumes — and nickel. Ukraine is a major exporter of corn and wheat, and a key route for the flow of Russian natural gas to Europe.
Broadly, two scenarios could contribute to sending prices on this range of commodities even higher:
- More supply chain disruptions, affecting the distribution of gas and wheat across Europe, for example. Russian cyberattacks, which some experts predict may now become more frequent, could worsen problems with global supply chains.
- Sanctions on Russia by the U.S. and allies, mainly sanctions on Russian oil exports, could squeeze markets even more.
Europe is a much bigger consumer of Russian oil than the U.S., but sanctions on Russia’s output would ripple through the global market, said Dean Foreman, chief economist at the American Petroleum Institute. Already, oil prices are high partly because there is not enough supply to meet global demand.
“Any significant disruption to that would have to be made up somewhere else,” he said, adding that the already tight market would have trouble finding a replacement.
Early Thursday, oil prices on both sides of the Atlantic jumped toward or above $100 per barrel — to their highest levels since 2014 — up more than 6%. The spot price in Europe for natural gas, which the continent relies on Russia to supply, jumped more than 50%. Wholesale prices shot up for heating oil, wheat and other commodities.
Californians could feel the bite even more. Gas prices here are well above those in the rest of the country — the current average price in the state, about $4.77 per gallon, is about $1.20 more than Thursday’s U.S. average, according to AAA.
What worries some economists is not just that oil and gas prices are on the rise, but that this often portends a boom-and-bust cycle that is bad overall for the economy.
“Throughout the history of the oil world, you have the geopolitical conflict,” said Amy Myers Jaffe, research professor at the Fletcher School at Tufts University. “It brings an unbelievable height to the price of oil over and over again, and it’s always followed by an economic crisis that brings a collapse in the price of oil.”
What does this mean for inflation?
Economists worry that higher food and energy prices could push inflation into double digits. U.S. inflation last month hit its highest level in a couple of generations, and higher consumer prices now could raise expectations of high prices for months and years to come.
The consumer inflation rate in January surged to 7.5% last month compared with a year earlier, well above the 5.7% average wage gain for most workers in the same 12-month period.
Even before the latest crisis, the Federal Reserve was poised to raise interest rates to combat surging inflation that, by some measures, has helped make consumers feel as gloomy as they did during the Great Recession of 2008-09.
What about the stock market?
Stocks tumbled around the world, as fears of a wider conflict and higher inflation rattled investors. The Standard & Poor’s index fell 1.1%, moderating a steeper drop earlier on Friday. The heaviest losses hit stocks in Europe.
Some analysts expect the conflict to push investors out of many tech stocks, with the exception of the cybersecurity sector.
Concern is growing that “massive cyber warfare could be on the near-term horizon, which would certainly catalyze an increase in spending around preventing sophisticated Russian-based cyberattacks,” analysts with Wedbush Securities wrote in a note to clients.
Associated Press writers contributed to this report.