The ballooning inflation rate in the U.S. may peak and stabilize within the next six to eight weeks, but the war in Ukraine has blurred predictions how the world’s economy will fare in the coming months.
That was just one takeaway from a media briefing by The Conference Board, the global business membership and research organization, titled “Forecasting the Economy Through the Fog of War.”
To some degree, the economic impact of the war hasn’t yet been fully realized, the board’s experts contended, but eventually no region or country on the planet will be spared the negative effects.
“There were negative economic trends prior to the Russian invasion of Ukraine that will be exaggerated and exasperated by the war,” said Lori Esposito Murray, president of the board’s Committee for Economic Development and Public Policy Center. “Sanctions will not end even if the fighting ends. Sanctions will not end unless there is a peaceful settlement, which doesn't seem like it's it's really on the table. And we're going to have to deal with the 11th largest economy with nuclear weapons being a pariah in the world economy.”
The world is witnessing at least six simultaneous shocks from the war, having deleterious effects not only on economies and people in the region, but throughout the world.
“We're seeing increases in prices for commodities, including oil, natural gas, grains and food, as well as metals, particularly precious and rare-earth type metals that come out of Russia and Ukraine that go into items like semiconductors,” said Dana M. Peterson, chief economist. “And semiconductors are key inputs to intermediate goods and finished goods, including cars, appliances, cell phones, gadgets. So with these shocks to commodity prices, we're really risking shortages.”
Oil Prices Threatened
And those shocks could be even worse if sanctions are extended to a ban on Russian oil and gas in Europe, she said. The board said oil prices also could peak in the second quarter of the year and could climb to as much as $200 per barrel, though more likely somewhere between $105 to $150.
The war has reduced The Conference Board’s prediction of global GDP growth by around 0.5% to 1% while the drag in the U.S. could be anywhere from three-tenths to eight-tenths of a percentage of GDP.
"We downgraded our global growth forecast by about six-tenths of a percentage point relative to what we were looking at before the war, for this year and next,” Peterson said.
Global inflation could be anywhere from a 10 to 3 percentage points higher as a consequence of the war, she added.
“The inflationary effects are quite acute in the U.S., but also in places like India, and a lot of that's a reflection of food prices rising very aggressively,” Peterson said. “But even in Europe, a lot of that is a reflection of higher energy prices. And so the inflationary effects are going to hit just about every economy, even if certain economies, particularly commodity producers, may benefit from the rising prices.”
While The Conference Board predicts that U.S. inflation may peak in the second quarter, there probably will be a few more elevated inflation trends.
“You have supply and demand drivers of inflation,” Peterson said. “And the Federal Reserve really can only address the demand issues, meaning very strong demand for goods and services now that people are getting back out there and engaging in in-person services, rising wages, and also pent-up savings. The Fed can address that and also housing market strength with their interest rate hikes.”
Higher And Faster
But the Fed can’t do much about the supply side drivers of inflation, she said, which include supply chain disruptions and higher global commodity prices. Nonetheless, the Fed has signaled it will raise interest rates this year and next.
“They've left themselves the option to raise interest rates by 50 basis points in any one meeting. Potentially, they'll do that in May; that would allow them to get to these higher interest rates faster,” she said. “They also could pause to get a sense of how the economy is faring, meaning the real economy. How consumers are handling it, how businesses are handling it, and also if there are extreme financial market disruptions. But all in all, the Fed is signaling higher interest rates. They also plan to reduce the size of its balance sheet.”
Meanwhile, labor shortages throughout the world may be here for a while, exacerbated by an aging population and more strict immigration policies in some countries. Those shortages result in rising wages which add to the inflation pressures.
“We’re going to see elevated inflation for some time,” Peterson said. “You may see businesses change to help manage costs. They may decide to adopt more technology to automate. They may focus on more remote work, which is actually helpful for businesses if they can attract labor in low-cost jurisdictions.”
Businesses also may consider experimenting with different modes of work to address higher costs such as more gig workers and contractors.
“But all in all, we do believe that inflation is probably going to be with us for longer,” she said.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].