Here’s how the Russia-Ukraine war is driving up prices
Russia’s invasion of Ukraine and the resulting sanctions imposed on Moscow are contributing to surging global prices that Americans are feeling throughout the economy, particularly at the grocery store and the gas pump.
Russia’s status as a major exporter of raw materials, especially oil and natural gas, along with Ukraine’s position as a key agricultural supplier to regions including Africa and the Middle East, make the conflict between the two countries a flashpoint for commodity prices, which were already on the rise due to the pandemic.
“These countries export a lot of raw materials,” William Reinsch, a former undersecretary of Commerce who now serves as international business analyst at the Center for Strategic and International Studies, said in an interview. “They tend to have a world price. And so when supply is constricted, the consequence for Americans is that the price goes up because it goes up everywhere.”
New consumer price index (CPI) data to be released Tuesday by the Labor Department is likely to show another sharp jump in both monthly and annual inflation. Consumer prices rose by 7.9 percent in the year ending in February, and signs of high inflation in March are mounting.
On Friday, the Food and Agriculture Organization (FAO) of the United Nations recorded a 12.6 percent increase in its benchmark food price index from February to March, an uptick it described as a “giant leap.” The March numbers represent all-time highs for cereal grains, vegetable oils and meats, while the sugar and dairy sectors also saw major gains.
The FAO cereal price index in particular saw a 17.1 percent increase from February to March, marking its highest level since 1990. The increase was “largely driven by conflict-related export disruptions from Ukraine and, to a lesser extent, the Russian Federation,” according to an FAO assessment.
The global numbers are consistent with the situation in the United States, where food prices spiked 7.9 percent in February compared to the previous year, the largest 12-month increase since July 1981, according to consumer data from the U.S. Bureau of Labor Statistics. The February food-at-home index, which looks at prices relating to domestic food preparation, was up nearly 9 percent in the same period, while wholesale prices for goods jumped 2.4 percent in February, the largest advance since data was first calculated in 2009.
The war in Ukraine also accelerated a steady rise in oil prices driven largely by the recovery from the pandemic. Fuel oil prices rose 6.7 percent and gas prices rose 6.6 percent in February alone, according to the CPI as crude oil prices rose toward $100 per barrel.
The price of a barrel of West Texas Intermediate crude peaked near $130 on March 8 before falling to roughly $94 on Monday, but gasoline prices have not fallen nearly as fast. A gallon of regular unleaded gas costs roughly $4.10, according to the AAA national average, down just 20 cents from a month ago.
While inflation-adjusted gas prices are still below the peaks seen in the wake of the Great Recession, higher energy costs can hit consumers harder than inflation in other sectors. Higher gas prices are not only difficult to avoid for drivers but can also increase transportation costs for store-bought goods.
Beyond the cumulative effects of rising commodity prices, which can ripple through the economy and become magnified as they work their way up global production pipelines, Russia does produce certain goods that U.S. companies, and by extension the nation’s consumers, use directly.
“Palladium, vanadium and titanium are three such goods,” said Reinsch.
Palladium is a component in catalytic converters, which convert toxic gasses produced by internal combustion engines into less toxic pollutants. Vanadium is added to steel to make it stronger, and titanium has numerous applications including aircraft shells.
“There are others who produce these products,” Reinsch said. “But again, it’s supply chain interruptions, and we have to scramble around to find them from other places.”
As more Americans feel the sting of inflation, the upswing in prices has emerged as a major campaign issue ahead of the 2022 midterm elections, with Republicans and Democrats taking turns placing blame for the upward trend in costs.
Republicans have blamed rising inflation on Democratic-backed policies, including the $1.9 trillion American Rescue Plan that President Biden signed into law in March 2021, about a year after former President Trump signed a bipartisan $2 trillion coronavirus relief package.
A number of Democrats have, in turn, placed blame on corporations and market concentration, accusing larger companies of taking advantage of economic conditions to increase costs.
By contrast, experts have pointed to a combination of factors that have contributed to the higher price stickers.
“Part of it is supply chain disruptions because of the pandemic. We can’t get the goods that we got before, for instance, like computer chips, and so on,” Desmond Lachman, a senior fellow for the American Enterprise Institute, told The Hill.
“But it was also the case that budget policy was too loose, and monetary policy was too loose. So we had all three things pushing in the same direction,” he said.
Ben Page, senior fellow at the Urban-Brookings Tax Policy Center, also told The Hill that stimulative fiscal policy contributed to inflation but added he wouldn’t call it the “root cause for most of the inflation.”
“I think the way that you can see that it’s not purely driven by U.S. policy is that it’s not just a U.S. phenomenon,” Page said. “The increased inflation is something that we’ve seen across the world, or certainly across the developed world.”
The U.S. has joined 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 have been aimed at raising costs for Russia and restricting how its government accesses the global financial system.
“So, limiting their bank’s ability to the government’s ability to use global banks,” Ziemba continued. “And the sanctions program was set up in a way that tried to use the areas of asymmetry that would hurt Russia more than it would hurt the U.S. and Europe.”
On the flip side, Ziemba said some of the impacts the U.S. has seen as a result of the sanctions have been “sort of indirect,” while Russia has faced more payment challenges.
“The other issue, of course, the Biden administration is trying to do what they can to alleviate some of these costs. The challenges are we’re in a tight market … and I do think one of the challenges is going to be that a number of the producers of particularly oil and gas don’t make decisions quickly to change their production,” Ziemba said.
“I think that’s where the debates with sort of countries like Saudi Arabia and the UAE [United Arab Emirates] have been reluctant to deviate from their go-slow additional supply policy have been disappointing to the administration,” she added.
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