Oil Prices, Ukraine War Could Tip U.S. Into Recession, Economist Warns
Washington Times, The (DC)
Soaring oil prices are increasing the risk of the U.S. falling into recession, a prominent economist told House lawmakers who debated whether Democrats’ massive spending or corporate greed caused record-high inflation.
Mark Zandi, the chief economist for Moody’s Analytics, told the House Financial Services Committee on Tuesday that elevated prices for oil and other commodities, partly due to Russia’s invasion of Ukraine, could force the Federal Reserve into “no good choice” on interest rates.
“We'll have to raise interest rates more aggressively, and recession risks will rise very, very quickly,” Mr. Zandi said. “This is still a low-probability scenario, but it's a rising one and increasingly more uncomfortable.”
He placed the odds of a recession at roughly 33% over the next 12 to 18 months.
The Fed’s board of governors will meet next week when the central bank is expected to raise a key interest rate by one-quarter of a percentage point. The move is aimed at limiting price hikes in the relatively strong economy, but higher interest rates also raise the cost of borrowing and generally curtail job growth.
Inflation in January reached an annualized rate of 7.5%, a 40-year high. Mr. Zandi said inflation cost the average U.S. family about $3,300 more in 2021.
He also said the increase in gas prices since Russia’s Feb. 24 invasion of Ukraine has already cost the typical U.S. family about $50 more per month.
Rep. Maxine Waters, the California Democrat who chairs the committee, and several of her invited witnesses blamed inflation on corporate mergers decreasing competition and on corporations setting prices artificially high. Their comments largely echoed the sentiments of President Biden.
“Corporate profiteering is playing an important role in rising prices,” said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive think tank. “Corporate executives and shareholders are enjoying the highest profit margins in 70 years, and consumers are paying the price. Today’s price increases are the direct result of the outsized power that mega-corporations hold over our supply chains and our economy more broadly.”
But Tyler Goodspeed, former acting chairman of the White House Council of Economic Advisors in the Trump administration, testified that demand for goods in March 2021 shot up at an annual rate of 240%, just as congressional Democrats approved Mr. Biden’s $1.9 trillion American Rescue Plan.
“We had a massive increase in demand [and] impaired supply,” said Mr. Goodspeed, a fellow at the Hoover Institution. “That difference has to go into prices.”
He also said the U.S. ranked third among 46 major world economies in the rate of inflation increases from 2019 through 2021. Mr. Goodspeed also said the rate of U.S. inflation has been three times higher than in Europe.
Rep. Patrick McHenry, North Carolina Republican, said Democrats shouldn’t have rammed through Mr. Biden's $1.9 trillion spending bill on a partisan basis when the economy was already recovering from the COVID-19 pandemic.
“Democrats control the House, the Senate and the White House,” Mr. McHenry said, “and sent a $2 trillion bill to juice the economy at the very time the economy was ripe to open. That’s why we’ve exacerbated the problems.”
Rep. Brad Sherman, California Democrat, conceded that inflation is “maybe a third larger here in the United States than in most of the developed world.” But he said inflation “has been a worldwide problem since COVID.”
“We had a lot of fiscal stimulus, we should remember that most of it was bipartisan,” Mr. Sherman said. “Most of it was signed into law by President Trump. Yes, there is one bill for $2 trillion that was Democratic.”
Mr. Zandi said blaming inflation on government policies is “a misdiagnosis of the problem.”
“In my view, the policies put forward in the pandemic through the American Rescue Plan, beginning with the Cares Act [of 2020] but through the American Rescue Plan, were critical to the economic recovery, ensuring that the economy got back as quickly as it did to close to full employment,” he said.