Putins stagflation revenge: Everyone said his war would destroy Russias economy but hes killing Americas too


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FORTUNE

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Between a tanking stock market, soaring inflation, and mounting recession fears, Americans are turning on the economy.

And somewhere, Vladimir Putin is probably smiling about it.

Amid all the chaos, inflation has become the biggest financial concern of nearly every American as prices rise for everything from gas to groceries.

There are several reasons that inflation reached a 40-year-high of 8.6% last month, including rising rents and labor costs. But economists say a major driver is Russia’s invasion of Ukraine, and the subsequent disruption to commodities that it has caused.

“The Russian invasion and spike in oil and other commodity prices is the No. 1 reason, followed by the pandemic & the housing shortage,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a recent Twitter thread.

The invasion in February immediately scrambled the global economy and sent international markets spiraling into uncertainty. Some commodities have been especially volatile, including oil and food, due to constrained supply from Ukraine and Russia.

Responding to the invasion, Western powers unleashed a crippling series of sanctions on Russia’s economy. Hundreds of international companies have left the country, and Russia’s subsequent isolation led to a GDP loss of 3.5% there in the first quarter.

But even as Russia’s economy feels the pain, President Vladimir Putin continues to dictate global prices for energy and food. Western sanctions are starting to hurt the U.S. and the rest of the world too due to recent surges in energy prices that have caused factory shutdowns and slower growth across the U.S. and Europe, proving that Russia has more leverage than Western leaders thought.

If the war continues to drag on, global financial institutions including the World Bank say that it could have even more serious consequences for the U.S. economy. And experts have started to sound the alarm about another financial threat not seen in decades: stagflation, a toxic combination of high inflation and slow growth.

“Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022,” World Bank President David Malpass recently wrote in the institution’s latest economic forecast.

The war will likely lead to “several years of above-average inflation and below-average growth,” Malpass added. “It’s a phenomenon—stagflation—that the world has not seen since the 1970s.”

The stagflation threat

Stagflation happens when growth slows significantly, but high inflation and prices continue to plague the economy.

The U.S. has not really seen stagflation since the 1970s, when that decade’s high oil prices led to simultaneous slower growth, high unemployment, and persistent high prices. Today’s circumstances are different from the 1970s, but a prolonged war in Europe would lead to very similar risks.

The war has created significant supply shortfalls for energy, food, and critical commodities including metals, exacerbated by existing supply chain problems related to the COVID-19 pandemic and subsequent lockdowns in large Chinese manufacturing hubs.

Supply shortages and soaring energy prices caused by the war have already begun forcing European factories to shut down. The manufacturing and industrial output in the U.S. is also starting to show signs of slower growth.

Lower industrial output could signal that a recession is nearing, as many economists are predicting. But with high fuel prices continuing to be a driving force behind high prices, it’s the perfect combo for stagflation.

Putin’s reprisal

Since the war began, a wave of Western sanctions has battered Russia’s economy, which preceded the departure of hundreds of foreign-owned enterprises and largely cut the country off from the global economy. But while sanctions have been brutal for average Russian citizen, with Russia’s inflation rate already at 20%, the country’s massive oil and gas sector continues to play a large role in global energy markets—and will probably continue to do so for some time.

The European Union has committed itself to reduce its reliance on Russian oil imports by 90% before year’s end. But the continent is still buying more than half of all Russian oil exports, and it might be a while before the West is able to completely wean itself from Russian fossil fuels.

And even if Europe is able to reduce its dependence on Russia, the country is still pursuing lucrative energy deals with China and Read more – FORTUNE

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