Brent crude oil, the global benchmark, rose as much as 6 percent to more than $100 per barrel on Thursday after Russia invaded Ukraine and could climb further as Russia reacts to sanctions from the United States and Europe. Russia is a major exporter of energy to Europe.
“Potentially, Russia could retaliate by limiting oil exports,” Patrick De Haan, head of petroleum analysis at GasBuddy, said on Thursday. Prices at the pump are likely to reflect repercussions from the conflict almost immediately, he said.
Some economists have noted an uncomfortable precedent when it comes to a gas shock.
Rising energy prices in the 1970s helped exacerbate inflation, causing rapid price increases to become a lasting feature of the economy, one that faded only after a painful response from the Fed. The central bank pushed interest rates — and unemployment — to double digits to bring price increases to heel during what is now known as the “Great Inflation.”
That episode happened after years of quick price increases that the Fed had proved slow to tamp down. This time, the central bank is gearing up to pull back support promptly.
Russia’s Attack on Ukraine and the Global Economy
Card 1 of 6A rising concern. Russia’s attack on Ukraine could cause dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.
The cost of energy. Oil prices already are the highest since 2014, and they have risen as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.
Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
Food prices. Russia is the world’s largest supplier of wheat and, together with Ukraine, accounts for nearly a quarter of total global exports. In countries like Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat imports.
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions designed to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
The Fed is expected to initiate a series of rate increases in March, policy moves that should slow down lending and spending, which could translate into weaker hiring, more subdued economic growth and more modest price gains.
“The Ukrainian situation does not alter, likely, the fundamental conclusion that it’s time to change monetary policy,” said Julia Coronado, founder of MacroPolicy Perspectives. “They’re not going to just shelve all the interest rate increases because there is a war in Ukraine.”
While the Fed officially targets headline inflation, it also keeps a careful eye on a core price measure that strips out fuel and food costs, both of which bounce around from month to month. Core inflation picked up by 5.2 percent in January from the prior year, the quickest pace of increase since 1983. It has posted 0.5 percent monthly increases for four straight months.