How Does the Ukraine War Affect the U.S. Economy?

Cindy Robinson

Dr. Kimberly

ENGO 111

July 17, 2022

How Does the Ukraine War Affect the U.S. Economy?

I chose what John Cassidy wrote in his article on March 14, 2022. How big of a threat is the war in Ukraine to the U.S. economy? Click on this link to read John’s article: https://www.newyorker.com/news/our-columnists/how-big-a-threat-is-the-war-in-ukraine-to-the-us-economy. When Vladimir Putin invaded Ukraine, many experts dismissed its impact on the U.S. economy, which had been gaining steam as it reached the year 2022. According to Moody’s Analytics head economist Mark Zandi, “the implications of the Russian attack on the U.S. economy are on the margins.” When it comes to this issue, however, the situation has changed. Late the other week, Goldman Sachs' statistics department predicted that GDP in the United States would rise by only 2.1 percent from the regular season of last year and the regular season of this year, a significant reduction from the 5.7% growth forecast in 2021(Hanna, 2022). They also anticipated that the economy would enter a downturn, typically characterized as two-quarters of negative GDP growth, during the next twelve months at a rate of twenty to thirty percent.

Several things have contributed to the shift in voice. In response to Putin’s aggression, the United States has imposed unprecedented economic sanctions on Russia, increasing the price of oil to around $100 per barrel, with the likelihood of more extraordinary hikes in the months ahead. The war appears to be dragging on. As per the American Automobile Federation, the national average price of gasoline has jumped to $4 per gallon, with some areas of California seeing prices as high as $7 per gallon. Economic growth is slowed by rising energy costs, reducing the desire for those other products and services. The overall increase in consumer price inflation is already at its highest level in forty years, at8% in February (Hanna, 2022). March’s inflation rate may rise above 9% due to the rise in gas costs since the Ukraine crisis began.

The Russian attack on Ukrainian is a negative supply shock, which stops production and increases prices. As long as the conflict doesn’t spread beyond Ukraine, the change in supply probably won’t be big enough to stop the U.S. economy from growing. In 2021, the economy proliferated even though oil prices went up sharply without help from Russia (Hanna, 2022). The main risk is that the Ukrainian change in supply comes on top of a global supply shock caused by the coronavirus disease outbreak, which shut down factories, messed up worldwide supply chains, and drove up the prices of everything from utilized automobiles to fried chicken. People are comparing this string of bad things to the 1970s when a sudden rise in the price of oil and rising prices at home led to disinflation and a recession. Chris Keller, who is in charge of leading economists at Barclays, said last week that the war in Ukraine is a “global stagflation shock.” Keller said that Eu was the most affected area (Canuto, 2022). Even so, the Us is not safe from it.

Jerome Powell, as well as his workmates at the Fed, had already decided a long time before the war started that the potential danger of rising inflation was enough to justify taking away some of the extra money they had given to the economic system during the pandemic. So at a meeting this week, they plan to raise the Fed funds rate from 0% to 0.25%.it will be the first moment since 2018 that they have done this. A funds rate of 0.6 percent was still shallow in the past. However, Wall Street expects six more rate hikes in 2022 and one per meeting. As the federal money rate increases, other interest rates, like those for mortgages and car loans, are likely to increase. If this increase in the cost of borrowing appears to work as the Fed hopes, it will slow down spending and investment and bring inflation down (Hanna, 2022).it is called a “soft landing” by economists. But this story is by no means a sure thing. When the Fed raised interest rates in the past to fight inflation, it sometimes sent the economy into a recession.

The Ukraine conflict’s repercussions make it more difficult for the Federal Reserve to implement a gentle economic downturn. According to many analysts, the pandemic’s impact on the supply chain was beginning to fade and predicted the inflation rate to climax in Late February before falling back dramatically. The timeline has been questioned, but it hasn’t been thoroughly disproved. According to the Rate of Inflation for February released last week, inevitable price increases have slowed or even reversed. For example, pre-owned automobile prices have risen by more than 40% in the preceding year alone. It was down by 0.2 percent last month, however.

According to these events, several analysts believe inflationary pressures will begin to ease shortly, notwithstanding the current turmoil in Ukraine and the oil markets. The annual rate of growth will continue to rise in March. Still, it will begin to decline fast as the commemoration of last Spring’s jump in used automobile prices approaches, Ian Shepherdson of Pantheon Macroeconomics wrote in an email to his shareholders on Friday. Shepherdson said that the labor market would be essential in deciding the future path of inflation. There is less risk of a spiraling wage-price relationship, which the Fed worries about most if salary rises are modest and productivity increases among workers. Shepherdson stated that “labor force data is reasonably positive” from an inflationary perspective (Hanna, 2022). According to the February jobs data from the Labor Department, payroll employment increased by 670,000, and the jobless rate fell to 3.8%, but average hourly wages barely budged.

Other analysts, including some Democrats, are less enthusiastic about the inflation prognosis as the conflict in Ukraine affects the price of cereals and other commodities aside from oil. For example, Jason Furman, a retired chief economist to Barack Obama who has been at Harvard, was on a panel with me last week and pointed out that while some economic theories indicate that price levels will decline, these designs failed to anticipate what occurred last year and many businesses owners plan to raise price increases further, citing rising costs as a justification for doing so Starbucks, Kraft, and Norwegian Cruise Line have all stated that they plan to raise prices this year, as has Kraft.

President Biden’s restriction on Russian imported energy, even if it raises gas prices and inflation pressure, is a move in the right direction, according to Furman, who emphasized the need to protect democracies from unjustifiable attacks. Vice President Joe Biden’s attitude when he conceded that the United States would incur costs if it banned Russian energy imports. How high will these expenses be? A clear indication that making economic forecasts is a risky pursuit: in the three days following, Biden made his pronouncement, and oil prices plunged by even more than 10 percent. That was an optimistic trend, but the more the conflict, the bigger the financial costs for both sides.

References.

Canuto, O. (2022). War In Ukraine And Risks Of Stagflation. Policy Center For The New South, March.

Hanna, M. (2022). HOW WAR IN UKRAINE IMPACTS THE WHOLE WORLD. In The Science Of The XXI Century: Challenges Of The Contemporaneity [Еlectronic Edition]: Proceedings Of The All-Ukrainian Scientific And Practical Student Conference (Kyiv, May 12, 2022)–Kyiv: the State University Of Trade And Economics, 2022.–406p.–English, German, Czech. (P. 238).