Boomflation to stagflation
Russia’s invasion of Ukraine will simultaneously worsen inflation pressures and damage growth prospects throughout the global economy. That makes it a stagflationary shock, essentially making things worse on all economic fronts at once, Axios’ Neil Irwin writes.
Why it matters: So far in the pandemic recovery, major Western economies have had boomflation — strong growth with high inflation. What we may face now is the kind of inflation that could undermine the “boom” part and worsen the “flation” part.
- It’s not the kind of economic disruption that can be fixed with clever use of fiscal or monetary policy. It’s all pain, no gain. The effects are likely to be most severe in Europe, where economic ties with Russia and Ukraine are deepest.
- But through the deeply interconnected global financial and commodity markets, the ripples are set to spread worldwide.
State of play: There will be continued and escalating financial sanctions on Russia, damage to Ukraine’s export industries, and high risk of further ripple effects from both physical attacks and cyberattacks.
- All of those amount to a negative supply shock — meaning that the productive capacity of the world economy is simply lower than it was a few weeks ago.
Higher energy prices — already evident in commodity markets — directly feed into higher inflation, but the risks are more sprawling and hard-to-calculate than that implies.
- The risk of disruption to Western European energy supplies and transportation networks, and the potential for cyberattacks contributes to the strain on global supply networks that have already been at their breaking point.
The U.S. is relatively insulated from the immediate economic damage, with its location an ocean away, strong domestic energy production, and robust (maybe too-robust) consumer demand.
- For the U.S., the direct impacts of the conflict are likely to push already-too-high inflation even higher.
- Those effects should on their own be short-lived, but the timing means they risk further entrenching Americans’ rising inflation expectations.
The bottom line: Usually geopolitical strife represents a short-term blip for financial markets and a buying opportunity for the gutsy. That could yet be the case with Ukraine, but the range of possibilities is ominous.
Plus
The economic consequences of war in Europe
War has returned to Europe. And while there will be much discussion of its geopolitical and humanitarian implications, Michael Strain suggests that there will also be profound economic consequences. Desmond Lachman discusses Russia’s ability to weather economic sanctions and what a disruption to the world’s energy infrastructure could mean for the domestic economy.
Sometimes when the Federal Reserve tries to quash inflation, it ends up causing a recession. James Pethokoukis considers how such a scenario could affect Joe Biden’s political prospects. Pethokoukis also considers public investment in the next generation, and Paul Kupiec breaks down two legislative proposals related to the creation and governance of a Federal Reserve digital currency.
