Putin, War, and Inflation
Inflation is the Handmaiden of War
For reasons unknown, Vladimir Putin started a war by invading Ukraine, the first such intense military action in Europe since World War Two. Unfortunately, inflation is the handmaiden of war. There are many causes for the inflation we are experiencing now, and while inflation had been creeping up, the Russo-Ukraine war set off the powder keg in the U.S. and the EU.
When a war begins, civilian goods and raw materials are diverted to the military, creating shortages and driving up prices. Commodities are subject to embargo. Supply chains are disrupted. Add the additional stress of the pandemic, and you have an economic five-car pileup on your hands.
Demand-Pull Inflation
The U.S., EU, and other countries placed trade sanctions on Russia after they invaded Ukraine. This action had a ripple effect worldwide because many commodities are priced in a global marketplace. Because Russia and Ukraine supply 30% of the wheat consumed in the world, a decrease in wheat exports from those countries, for example, can raise the price of bread in Iowa even though the US doesn’t import wheat. [1]
Shortages Created By Sanctions and Commodities Held Off Market
Demand-pull inflation, which is what we are experiencing, is caused by too much money chasing too few goods. Sanctions placed on Russia have created artificial shortages of many commodities. While agricultural commodities from Russia or Ukraine are not under embargo, the Russians reduced their wheat exports because they were miffed at the sanctions, and for months their navy had blocked grain exports from Ukraine.
In late July, Russia allowed the grain trade in Ukraine to resume, although cargo vessels must pay steep maritime insurance costs. “Premiums to go into the broader Black Sea area have risen sharply to as much as 5% of the value of the ship from 0.025% before the invasion.” [2]
This war risk premium is something many cargo lines don’t want to pay, nor do they want to risk their ships. The OECD reports not enough shipping capacity is available to transport all the agricultural products available for export from Russia and Ukraine. [3] Hence, Russia’s actions and inactions will continue to cause rising prices. While the global price of wheat has come down, it remains 11% higher than one year ago. [4]
Russian Natural Gas: Holding Europe Hostage
Russia is a major exporter of oil and natural gas. In 2021, Russia supplied 40% of natural gas used in the EU, making many of those countries highly dependent on Russia. Because European countries led by NATO denounced Putin’s invasion of Ukraine, he ordered supplies of natural gas reduced by as much as 50% to EU countries that have sanctioned Russia, especially Germany. [5]
Rising Price of Natural Gas Contributing to Global Inflation
The reduction in supply to Germany and the EU has decreased the global supply of natural gas, causing the price to rise in the U.S. even though we produce enough natural gas for ourselves with a surplus we export. [6] While we are insulated to a degree because our domestic production is so high, we still feel the impact of rising global prices. The scorching weather in the U.S., the EU, and other countries has increased the demand for natural gas by utility companies to generate power for air conditioners.
Natural gas supply has decreased, demand has increased, prices have been driven up, and inflation is the result. There isn’t much we can do about it until Putin decides to stop demolishing Ukraine.
Resource(s):
[2] reuters.com/business/finance/ascot-marsh-insure-grain-ship-ukraines-black-sea-ports-2022-08-22/
[4] https://tradingeconomics.com/commodity/wheat
[5] https://www.bbc.com/news/58888451
Contributing Writer: Subject Matter Expert Charles McCain
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