Theory and practice of butterfly flapping. A war in a country thousands of miles from the nearest US city threatens to increase the cost of living in Boston or Chicago, already high due to inflation. Also with shaking investment portfolios and slowing down the economic recovery, which was advancing briskly after the pandemic despite the turbulence of the global jam in supply chains. The sum of all the factors – runaway price increases, stock market volatility, shortages of essential materials in industry, as well as increasingly expensive energy – constitutes a major challenge for the US economy after two years of extreme tension. From inflation, some have gone on to speak of the risk of stagflation—high inflation, low growth—especially if the war drags on. Comparisons with other traumatic historical contexts —the oil crisis of the 1970s; the impact on oil prices of the 1979 Iranian revolution—proliferate. The White House veto of Russian crude adds uncertainty to the scenario.
“Stagflation is getting the attention it deserves at the current juncture. During the pandemic, we injected billions of dollars into economies and did not think about the consequences. Also, we could not have foreseen the effect of the supply chain outages and the war in Europe. Adding all the factors, prices only had one way out, going up, while the GDP in many countries deflated. Stagflation shows that economic theory is usually correct,” says Eric Adams, Professor of Economics at Ryerson University in Canada.
The current one constitutes a convulsive scenario. The Federal Reserve (Fed, the acronym for the US central bank) will announce on Wednesday the first rate hike since March 2020, theoretically 0.25%. The lessons of the seventies advise calm and the president of the organization, Jerome Powell, has insisted that the bank will move “carefully” when it comes to tightening its monetary policy. Only a month ago, the increase in the price of money was seen as a timely measure to contain inflation, which rose to 7.9% in February; now it looks like a Band-Aid trying to plug a bleed. Economists predict that it could reach a rate of around 9% in the coming months.
The Fed is clinging to core inflation — discounting more volatile energy and food prices — to deliver that message of calm, but the inflation-adjusted real price of oil has soared almost to the level it reached during the revolution. Iranian. The US is much more protected than other countries because its production equals its consumption, so an increase in the price of a barrel will have a neutral impact on GDP. But not in the pockets of consumers, as President Joe Biden stressed when announcing the ban on imports of Russian crude on Tuesday: “Defending freedom has a cost, also for us.”
He knows in depth all the sides of the coin.
The volatility generated by the conflict advises daily forecasts, almost to the minute, so as not to become obsolete or err on the side of modesty. The price of a barrel of Texas, the benchmark in the US, fell 12.1% this Wednesday, to $108.70, after the peak of $130 reached on Sunday (the highest since 2008). Its break-even point stands at $75. This Wednesday the average price of a gallon (3.7 liters) at the country’s pumps was 4,252 dollars, with peaks of 5,573 in places like California. Oil futures prices were lower than spot prices, suggesting the market expects the rise to be temporary.
With the approval, this Monday, of the twelfth exchange of 2.7 million barrels of crude oil to ExxonMobil from the Strategic Petroleum Reserve, Washington has released 24.4 million barrels since the end of November to limit the impact of the rise in the consumer. A measure forced by inflation that has ended up being premonitory, as well as preventive.
“Although the US is more energy independent than the EU, it will have to deal with even higher inflation due to shock global energy,” says Jack Rasmus, professor of economics at Saint Mary’s College in California. “Oil companies raise prices not for legitimate supply or demand reasons, but because, as monopolies in their respective economies, they simply can. That has already been happening in the US economy before the war. Almost half of its latest annual inflation rate of 7.5% is linked to the price of oil.
The signals are contradictory, changing. Faced with the gloomy forecasts that hang over the eurozone, the US can emerge almost unscathed, with “moderate” damage, according to the credit rating agency Moody’s, and a slightly lower than expected GDP forecast this year (a 3, 5% vs. 3.7% expected). The excess savings in households due to the injection of stimuli from the federal government to counteract the pandemic can cushion the sharp rise in energy. But not only fuels and electricity rise: also, in a runaway way, rents; used cars, plane fares… not to mention the shopping cart.
“It is difficult to gauge the general sentiment among economists, market analysts and price setters. But it is true that there is an emerging conversation and more visible about the possibility of stagflation. It is a combination of economic growth under or negative and inflation high. The low and high of the above sentence are arbitrary. Those who see 5% to 7% inflation as atyou and economic growth below 2% as low, they are already talking about stagflation. Can this go on for a while? It could (unless wages remain stable, which means workers remain powerless to negotiate higher wages), and so it’s not so far-fetched to talk of stagflation, even if you don’t think 5%-7% inflation it’s high,” Talan Iscan, a growth specialist at Dalhousie University, says by email.
The volatility of other In the case of the United States, raw materials will have a special impact on the supply chain, already tense since the appearance of the delta variant of the coronavirus. Materials such as nickel, aluminum or neon gas, not to mention tungsten, whose world reserves are divided between China and Russia, are essential in the manufacture of lasers, electronic batteries, semiconductors, clean energy facilities and the automobile industry. In other words, the threat of a further shortage could paralyze activity in sectors already affected during 2021. But also in the primary sector: farmers are preparing for an increase in the price of fertilizers, already at record levels before the conflict. Russia, a global producer of low-cost, high-volume fertilizers, is the world’s second largest producer of potash after Canada, a key nutrient used in major crops, which will have direct consequences on the price of some foods.
aluminum and nickel
“The second day of the invasion [25 de febrero] Biden announced that Russia’s aluminum exports were exempted after meeting with officials from the auto and canning industries, which depend on Russian imports of raw aluminum; They are 10% of the total. Other critical metal-based imports can be expected to quietly gain exemptions in the sanctions battery,” explains Rasmus. In addition to nickel, the price of metals used in the auto industry, from aluminum in car bodies to palladium in radiators, has also skyrocketed since the invasion.
Professor Rasmus sees a probable recession. “The sustained increase in inflation, the cuts in social spending and the increase in interest rates will together delay an incipient economic recovery; a recession is very possible in late 2022 or early 2023. In short, the US economy will feel the negative effects of the Ukraine war in terms of inflation, household disposable income and unstable central bank monetary policies. Somehow the effects of the war will be less than the effects felt in Europe; though in other ways they may be more severe.”
Regarding stagflation, Rasmus proposes waiting to see the growth data for the first quarter of the year. “You start talking about it, but the mainstream media does everything they can not to exaggerate. I think the probability will grow once the first quarter 2022 GDP report is released, with surprisingly low growth, maybe even zero, according to the Fed’s preliminary forecast in Atlanta [0,5%, cálculo del 8 de marzo; medio punto más que el 1 de marzo]. As for Europe, it will soon, if not sooner, slip into another recession, as its industry is so dependent on oil, gas and raw materials, the price of which continues to rise. Europe will be the most affected. Commodity inflation will continue to rise for months while real economies will take a big hit. That is stagflation.”