Deficit and inflation in America: how the US economy is suffering from the Russian-Ukrainian conflict

Many Americans may prefer to keep the US out of the conflict between Russia and Ukraine, brewing violence and political fallout already hitting their wallets, reports CBS.

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Gasoline prices, which have reached an eight-year high, could rise even more if hostilities escalate or if US lawmakers pass another round of sanctions.

Wall Street analysts warn that the economic impact could extend beyond the gas station. Sanctions or export controls on Russia could further exacerbate the current semiconductor shortage, and restrictions on wheat or metals could fuel the worst inflation spike in decades.

"Shockwave across America"

Russia is a major exporter of crude oil, accounting for about 12% of world supplies. Any disruption to these exports is likely to drive up prices for consumers, experts said.

“If Russia attacks Ukraine, we could see oil prices above $100 a barrel next week,” said Patrick DeHaan, head of oil analysis at GasBuddy, adding that average U.S. gas prices are likely to reach $4 a gallon. in the coming weeks or months.

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“We haven’t seen that $4 for a very long time — it would cause a shock across America,” he said.

A key factor in how hard the conflict will hit the economy will be how Russia responds to US sanctions, which President Biden outlined on Feb. 22 afternoon. Biden moved to cut off two Russian banks and the state's sovereign debt from Western funding, while individuals would also be targeted.

Russia could retaliate by cutting off oil and natural gas exports, DeHaan said. This will put pressure on US gasoline and natural gas prices, which have already risen this year.

“The world economy really depends on global energy. How can the world impose sanctions on the Russian economy unless Russia says, “We're going to take the next step for you and not export any more energy?” he asked. “If the Russian economy collapses, they will drag the world economy down with them.”

The Washington Post reported Feb. 22 that the White House is considering another withdrawal from the Strategic Petroleum Reserve, and US officials plan to funnel more natural gas to Europe.

Another blow to supply chains

While oil is Russia's most important export, both Russia and Ukraine are also major suppliers of agricultural products such as wheat, rye, barley and other grains to Central Asia and the Middle East. Disruptions in commodities could push global food prices up, putting pressure on US consumers.

Russia also produces just under half of the world's palladium and a minority of platinum and nickel, key elements of complex microchips used "in everything from electric meters to complex BMWs," said Joe Brusuelas, chief economist at RSM. Russia is also a major aluminum producer.

Ukraine is the largest producer of uranium in Europe and has huge reserves of titanium, manganese, iron and mercury, Peter Bukvar, chief investment officer of Bleakley Advisory Group, said in a report.

“Because commodity prices are so high, any disruptions will make a big difference,” he said.

While the extent of the impact will be uncertain, critical metal shortages could exacerbate the current semiconductor shortage and drive up the price of cars, electronics and other high-value goods even further. Along with rising commodity and energy prices, today's price hikes threaten to make matters worse for many consumers.

“We are talking about another round of shocks in developed countries,” Brusuelas said.

More inflation, slower growth

Rising commodity prices will cause US consumers to pay more for fuel and other necessities, leaving less money for personal expenses.

“As costly as another European war may be in terms of people and economy, its economic burden in the United States will fall hardest on the middle and working classes,” Brusuelas said.

While prices have skyrocketed during the coronavirus pandemic, consumers have been able to weather the shock thanks to increased unemployment benefits, federal pandemic payouts and tax credits from the US government.

In the event of a full-scale war in Ukraine or tightening sanctions against Russia, rising energy prices and reduced consumption could reduce US economic growth by 1%, according to Bruzuelas.

“If energy prices rise more than our baseline expectation of 20%, say close to 40%, we will be talking about a premature end to the business cycle,” he said.

Unstable stock markets

The conflict is also rocking markets around the world. Wall Street analysts say US stocks, which hit record highs last month, will remain volatile throughout the conflict.

“Today's turn in global markets underscores how risk perceptions related to the conflict in Ukraine have become an increasingly important factor over the past few weeks,” Jonathan Petersen, markets economist at Capital Economics, said in the report. “Since early February, oil and safe-haven assets (such as gold and US Treasuries) have risen, while stocks and some currencies (such as Russian stocks and the ruble) have come under pressure.”

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Market turmoil is likely to have a limited impact on most Americans, as only a small portion of the population owns stocks. However, for those who do, especially workers with 401(k) or IRAs in the stock market, turbulence can hurt their portfolios in the short term.

Stock market turmoil can also have a psychological effect, undermining consumer confidence and holding back spending, hurting economic growth.

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