Some say you’d better fill up your tank in the morning, otherwise when you drive home at night, gas prices will be higher.
Actually, it’s not an exaggeration. The price of oil is the single most important measure of inflation that most Americans actually feel. Oil prices were already moving higher before Russia launched military action in Ukraine on Feb. 24, and have risen every day since.
But soaring oil prices don’t stop there: they weigh on working people, drag on economic growth and are a significant problem for a range of financial assets: stocks, bonds, gold and commodities like nickel and wheat.
These problems pale in comparison to the suffering inflicted on Ukrainians by Russia’s military actions. It’s worth noting that Russia’s actions, along with western moves to impose sanctions on Russia and aid to Ukraine, are rippling through global financial markets, affecting, to a greater or lesser extent, everyone in the United States and around the globe. Since the Russian campaign, the average price of regular gasoline in the United States has surged 17% through March 9 and is up 23% since the start of the year.
A gas station in Beverly Hills, California.
On March 8 alone, the average price of regular gasoline rose 8 cents to $4.25 a gallon, according to AAA; In places like California, prices are much higher, at $5.57 a gallon. For a variety of reasons, gas prices in many communities are even higher.
A sustained, sharp rise in oil prices is inevitable. Gasoline prices are largely set by crude oil prices, which have soared because of the Conflict with Ukraine and western sanctions. With the US and UK banning Russian energy imports announced on March 8th, the rise in global oil prices seems far from over.
Paul Ashworth, chief United States economist at Capital Economics, said wholesale and retail gasoline prices follow where crude oil prices go. Even if crude oil prices stop rising, which they are, retail gasoline prices in the US will average $4.50 a gallon by April, he says.
In fact, Mark Zandi, chief economist at Moody’s Analytics, predicted global oil prices would rise to $150 a barrel, or about 20 percent, after the United States and The United Kingdom announced bans on Russian energy imports. “This will continue for at least a few weeks until the international situation starts to clear up.”
Rising prices for petrol and other basics inevitably hurt those on a budget who must drive to work or school and cannot cut back on food.
The average U.S. household will spend about $3,100 on gasoline in 2022 at December 2021 prices, according to estimates by Ya R den iResearch, an independent economic and stock market consulting firm. But the recent spike in oil prices means households will have to pay about $2,000 more.
If you are rich, or drive an electric car, you will not be affected. But for many workers, it amounts to a tax increase. “A lot of people have no choice because they normally have to drive,” Ashworth says.
In addition, food prices continue to climb. Russia and Ukraine together accounted for 28 per cent of global wheat trade and 18 per cent of global corn exports last year. Wheat futures have jumped 37 percent this year and 28 percent since the conflict began Feb. 24. YardeniResearch estimates that given the difference in price trends between now and December 2021, the average American family will spend $1,000 more on food this year.
Add in gasoline, and households are likely to spend about $3,000 more on those two items this year, hitting low-income people hard. And that creates more problems for the Fed, which is already struggling.
Inflation has been rising for some time. The consumer-price index (CPI) for February, released on March 9th, is likely to be even higher than the previous month’s 7.5%.
Spillovers from the Conflict between Russia and Ukraine could also push up April’s inflation figures, but they may look better than the high rates caused by supply chain disruptions during the coronavirus pandemic.
If commodity prices continue to rise, inflation will not fall as quickly as many economists thought a month ago. So the Fed will remain under intense pressure to start raising rates. And higher rates could slow growth.
At the same time, rising prices and reduced consumer spending as a result of the conflict are likely to hurt the economy. Stagflation and recession will return, thanks to a combination of rising interest rates and an oil shock.
These are just possibilities, but the fear they are generating is weighing on capital markets.
The volatility in long-term Treasury yields suggests a lack of confidence in the direction of the economy. If the Fed raises rates, short-term rates will soon exceed long-term rates — another bad sign for the economy. Such interest-rate reversals usually precede recessions.
The U.S. stock market has had one of its worst starts to the year since 1990, according to Bloomberg data. The markets are shaking wildly.
The S&P 500 is down more than 10 percent from its peak this year, what Wall Street calls a correction. The Nasdaq composite index is down more than 20 per cent from its peak in November.
For long-term investors with a balanced and diversified portfolio of stocks and bonds, such declines are cyclical. They will feel painful, but if history repeats itself, stocks will recover and hit new highs again.
If the closure of Russian financial markets and the rise in commodity prices lead to a sharp fall in U.S. stocks, that could have other unintended effects, putting the Fed in a bind. It is moving towards tighter monetary conditions, but may have to change course and carry out another rescue operation.
