The threat of a large-scale Russian invasion of Ukraine raises the risks of an energy supply shock, which some observers say could push the annual US inflation rate to 10% at some point. , compared to 7.5% in January.
That’s the view of RSM Chief Economist Joseph Brusuelas and Daniel Tenengauzer of BNY Mellon. In a phone interview on Tuesday, Brusuelas said such an energy shock would reduce US gross domestic product by 1% over the next year and raise inflation by 2.8 percentage points over the next three to six. months before price gains can subside once the Russia-Ukraine crisis stabilizes.
Read: Oil and natural gas prices rise after Russia sends troops to Ukraine
A 10% year-over-year gain in the consumer price index would be the biggest since October 1981. It would also surprise even some of the most sophisticated traders – who are bracing for the CPI annual peaks at 8% in March before dropping to 4% the following January, based on market-implied levels derived from the fixings.
The warnings come as the world’s biggest money manager reiterated his view that central banks could be forced to “live with” inflation. Indeed, aggressive rate hikes to combat supply-driven inflation “would only torpedo economic activity that has yet to fully recover,” wrote Jean Boivin and others at the BlackRock Investment Institute. in a note on Tuesday.
“There is clearly some uncertainty around the reaction function of global energy markets to an invasion,” said Brusuelas of RSM, a consultancy. He said a full-scale war in Europe would send the price of Brent oil to BRN00,
at around $110 a barrel, about 14% above its level on Tuesday.
To see: What war in Ukraine would mean for markets as Putin orders Russian troops into breakaway regions
In an alternative scenario, oil could even rise as much as 40%, pushing the CPI even further above 10%, the Austin, Texas-based economist told MarketWatch.
“It depends on the severity of the sanctions and what happens on the ground. There are all kinds of variables here that you can’t quantify or predetermine,” he said. What is more certain is that “inflation will not return to target within the next year or two, households will have to live with higher inflation than they have experienced in the past four decades, and financial markets will experience volatility.”
Goods Corner: Russia’s entry into Ukraine drives up commodity prices – here’s what’s at stake
Germany’s decision to suspend certification of the Nord Stream 2 gas pipeline, which was built to pump natural gas from Russia to Germany, “is no small joke”, said Daniel Tenengauzer, head of market strategy for BNY Mellon in New York. The pipeline would double the capacity of the existing route between Russia and Germany, and natural gas alone “would have a very significant medium-term impact on inflation over the next few years,” he said. by telephone.
Although economists expect the CPI to fall to 3.3% in the fourth quarter of 2022, from 7% at the end of last year, “there is now a higher probability that headline inflation will exceed the consensus and last year’s figure – which will lead to maybe inflation touching 10%,” Tenengauzer said Tuesday. “It’s all going to be defined by where energy prices go from here. , I mean oil, natural gas and a whole bunch of other stuff, even coal prices.
The ongoing Russian-Ukrainian crisis heightens the risk of stagflation among a variety of unrelated shocks. Besides the pandemic, there are climate-related considerations, from China’s drive for sustainability to “lack of wind in Europe”, and supply constraints “have exceeded all expectations in terms of reach and persistence”. , according to Rabobank strategists Richard McGuire and Lyn Graham-Taylor.
For his part, BNY Mellon’s Tenengauzer says he is focused on China’s zero-tolerance policy on COVID-19, particularly in Hong Kong where city officials are considering targeted stay-at-home restrictions if necessary to contain an outbreak of cases.
US stocks ended sharply lower on Tuesday, with the S&P 500 SPX index,
falling into its first correction in two years as the Russian-Ukrainian conflict escalated. Meanwhile, Treasury yields were generally higher, with the 10-year rate TMUBMUSD10Y,
trading around 1.94%.