Financial markets shake off Ukraine invasion, but economic dangers still linger

0

By the end of trading, crude had given up most of its prior gains. All three major US stock indexes were in the black.

Economic crisis averted? It is much too early to sound the green light.

Together, Russia and Ukraine represent a tiny slice of world economic outputbut the fallout from Russia’s use of force still poses a threat to American consumers and businesses.

The greatest danger remains inflation, which surged even before Russian President Vladimir started beating the war drum.

Oil prices have been a big driver of inflation, jumping more than 70% last year. At the pump, a gallon of regular gasoline costs an average of $3.56 in Massachusetts, down from $2.59 a year ago, according to AAA. Heating costs are also significantly higher than last winter.

Although Biden has not limited energy exports from Russia, a major oil and gas producer, that could change depending on what Putin does in Ukraine. Also, Putin could suspend sales to the West in retaliation for sanctions. The United States doesn’t import much Russian oil or gas, but in energy markets, supply cuts in one corner of the globe impact prices everywhere.

“Russian stocks have added about $20 a barrel to oil at this point, which means gasoline prices are headed for $4 gallons if higher oil prices continue for the 6-8 coming weeks,” said Mark Zandi, chief economist at Moody’s Analytics. in an email. “This only adds to the painfully high inflation that households are facing.”

Russia is also a major producer of wheat and other grains, as does Ukraine. Any disruption to their crop exports would compound the food price increases consumers have seen since 2021.

Gasoline and food prices also play an important role in inflation expectations, which is what consumers and businesses think they will pay for goods and services in the future. Rising prices can fuel rising inflation expectations, which in turn fuel higher prices as companies try to outpace the curve and workers demand higher wages.

This potential inflationary spiral only complicates The Federal Reserve’s plans to raise interest rates in an effort to mitigate price increases, according to Zandi.

“If inflation expectations start to rise, the Fed will have no choice but to raise interest rates even more aggressively, so it is already signaling that it will,” he said. he declares.

And, if the Fed goes above rates, consumers could pull back and the economy could slide into a slowdown.

“The risks of recession later this year and into the next are now uncomfortably high,” Zandi said.

Of course, the economic impact of Russian aggression largely depends on the duration of the fighting.

A prolonged period of inflation and market volatility would further erode consumer confidence, according to Morning Consult economic analyst Jesse Wheeler.

Putin’s actions have “shaken the markets and shaken the confidence of investors around the world”, he said.

Investors had braced for war as it became increasingly clear that Putin was determined to use force to bring Ukraine back under his control. US stocks had fallen more than 10% from recent highs.

Expect wilder days like Thursday, said Michael Arone, managing director of State Street Global Advisors.

“Biden’s response provided more clarity on sanctions,” he said. Now investors are waiting to see how Russia reacts.

“I expect that to unfold over the months, Arone said.

Diti Kohli of The Globe staff contributed reporting for this story.


Larry Edelman can be contacted at [email protected] Follow him on Twitter @GlobeNewsEd.

Share.

Comments are closed.