The western media has started playing mantra that Russian
invasion of Ukraine and the imposition of economic sanctions on Moscow are
contributing to surging global prices, particularly at the grocery stores and
the gas pumps.
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% 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% 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%
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% in February as compared to the
previous year, the largest 12-month increase since July 1981, according to
consumer data from the US Bureau of Labor Statistics. The February food-at-home
index, which looks at prices relating to domestic food preparation, was up
nearly 9% in the same period, while wholesale prices for goods jumped 2.4% 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% and gas prices rose 6.6% in February alone, according to the CPI as crude
oil prices rose toward US$100/barrel.
The price of a barrel of West Texas Intermediate crude
peaked near US$130 on March 8 before falling to roughly US$94 on Monday, but
gasoline prices have not fallen nearly as fast. A gallon of regular unleaded
gas costs roughly US$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 US
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 is 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 US$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, said a senior fellow for the
American Enterprise Institute.
“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 said 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 US policy is that it’s not just a US phenomenon,” Page said. “The
increased inflation is something that we’ve seen across the world, or certainly
across the developed world.”
In recent weeks, countries such as China, Egypt and France have
seen rising inflation rates, a trend expert say is exacerbating by the ongoing
Russia-Ukraine war.
The US 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, said 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 US and Europe.”
On the flip side, Ziemba said some of the impacts the US 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.
