Last Friday’s Consumer Price Index report showed consumer prices rose 8.6 percent from a year earlier and 1 percent from April — a monthly increase that was more rapid than economists had predicted and about triple the previous pace. Inflation Sped Up Again in May, Dashing Hopes for Relief :
Friday’s Consumer Price Index report offered more reason for worry than comfort for Fed officials, who are watching for signs that inflation is cooling on a monthly basis as they try to guide price increases back down to their goal. A broad array of products and services, including rents, gas, used cars and food, are becoming sharply more expensive, making this bout of inflation painful for consumers and suggesting that it might have staying power. Policymakers aim for 2 percent inflation over time using a different but related index, which is also elevated.
The quick pace of inflation increases the odds that the Fed, which is already trying to cool the economy by raising borrowing costs, will have to move more aggressively and inflict some pain to temper consumer and business demand. The central bank is widely expected to raise rates half a percentage point at its meeting next week and again in July. But Friday’s data prompted a number of economists to pencil in another big rate increase in September.
[E]conomists warn that wrestling inflation lower could be a slow and painful process. Production and shipping [supply chain] snarls tied to the pandemic have shown early signs of easing but remain pronounced, keeping products like cars and trucks in short supply. Putin’s war in Ukraine is elevating food and fuel prices, and its trajectory is unpredictable. And [pent-up] consumer demand remains strong, buoyed by savings amassed during the pandemic and wages that are rising robustly, albeit not enough to fully offset inflation.
[In] a statement after the release, Mr. Biden said the numbers underlined why inflation is a top priority of his, while emphasizing that prices are increasing around the world.
Inflation in the U.S. is at a 40-year high, but America isn’t alone. Soaring prices are a truly global phenomenon. U.S. inflation rate is in the middle of the pack globally:
An analysis of inflation across 111 countries from Deutsche Bank puts the U.S. near the middle of the pack. Among those countries, the median rate of 7.9% year-over-year inflation has more than doubled from 3.0% one year ago, thanks largely to spiking energy and food prices.
[As] in the U.S. and much of the world, sky-high energy prices exacerbated by the war in Ukraine have been a major driver of inflation in Europe. Energy prices in the U.S. are up 35% over last year, according to the Bureau of Labor Statistics.
They have spiked even higher (+51%) in the U.K., which like the U.S. recently recorded its highest inflation rate (+9.0%) since the early 1980s, per the Financial Times. The U.K.’s grim economic outlook is deepening concerns about a cost-of-living crisis.
[F]ood commodity prices are at a record high, according to the World Bank’s index, and have risen sharply since Russia’s invasion of Ukraine in February. The twin rise in energy and food prices is hitting developing countries particularly hard.
Rick Newman explains, The Putin price hike is real — and huge:
It seemed silly, in March, when President Biden started calling persistent inflation “Putin’s price hike.” The price of gasoline and many other things had been soaring well before Putin ordered Russia’s invasion of Ukraine on Feb. 24, and blaming that on Putin all of a sudden was opportunistic blame-shifting [according to GQP propagandists.]
More than 100 days into the war, however, the Russian president’s belligerence has clearly had the most pronounced effect on global prices of any single geopolitical development since the oil shocks of the 1970s. A new report by the Organization for Economic Cooperation and Development compares current forecasts for inflation, growth, incomes and living standards with forecasts at the end of 2021, to present a before-and-after perspective of how Russia’s warmongering is affecting the entire world economy. The impact is stark and likely to get worse, not better.
The pre-war year-over-year inflation forecast for the 38 OECD member countries was 4.4%. It’s now double that, at 8.8%. The United States, struggling with 8.3% inflation, is actually doing better than many other countries. Eastern European countries near the war zone, such as Poland, Latvia and Estonia, are on track for double-digit inflation. The inflation forecast for the U.K. is 8.8%. In Turkey, already beset by monetary-policy missteps, inflation has skyrocketed from 24% before the war to 72% now.
War in one country is causing economic pain nearly everywhere for a few reasons. The United States and many nations in Europe and elsewhere have layered tough sanctions on the Russian economy, to punish Russia for its barbarity, and that is causing considerable collateral damage. Russia is the world’s largest oil and gas producer, and while Russia is still exporting energy, sanctions have cut into Russian sales, leaving a supply shortfall just as the world economy is recovering from the COVID pandemic, which is boosting demand for energy.
“We were already in a tightening market last year,” says Raoul LeBlanc, vice president of the energy practice at S&P Global. “The COVID pandemic took down a lot of [refining] capacity and the [demand] rebound happened fast. It’s hard to restart a system, and meanwhile people want to get back on planes and drive to vacations.”
Oil markets could get tighter, sending prices even higher. Europe plans to phase out 90% of its Russian oil purchases by the end of the year, shifting to different suppliers or other types of energy. Russia will be able to sell some of that product, at a discount, to other buyers, such as China and India. But S&P Global estimates Russia’s supply of oil and oil products to world markets could drop by 20% to 25%, at a time when demand in China picks up as strict COVID lockdowns [eventually] end there. Other countries could slowly boost production to cash in on high prices, but there’s no spigot anybody can turn that will flood the market with new oil.
A ‘cost of living crisis’
Energy is an important input in transportation, manufacturing, food production and many other things. So rising energy costs push up the cost of other products, including necessities such as food. Compounding that problem is the Russian blockade of Ukraine’s Black Sea ports, which is blocking shipments of cooking oil, barley, wheat and corn to regions such as Africa and the Middle East that depend on Ukrainian food exports.
The U.S. and Ukraine are accusing Russia of “blackmail” and “exporting starvation” by preventing most Ukrainian agricultural exports through a blockade of Black Sea ports. Russia’s blockade of Ukraine’s grain hits countries around the world:
Many countries in the developing world are highly reliant on Ukraine’s wheat, sunflower oil and other exports. Without them on the market, prices are rising and the global food crisis is getting worse.
Ukraine accounted for 9% of global wheat exports, 15% for maize and 44% for sunflower oil in 2020. Some countries were far more reliant on Ukraine for those products prior to the blockade. Those include some of the world’s most populous countries: at least 25% of wheat exports in Bangladesh, Egypt, Indonesia and Pakistan came from Ukraine.
Nearly 30 countries rely on Ukraine for at least 50% of sunflower oil, which has been growing in popularity in countries including China and India.
Meanwhile, Ukraine has 30 million tons of grain sitting in silos. That accounts for more than half of the available storage space even before the new harvest begins this summer, meaning crops could be left in the ground if Russia continues its port blockade, per Reuters.
Next year’s harvest in Ukraine could be cut by up to 40% due to the ongoing Russian invasion, Ukraine’s Agrarian Policy and Food Deputy Minister Taras Vysotskyi told CNN Thursday.
“We have lost 25% of the arable area. In terms of volumes, of course, it is more. We anticipate that the harvest will be around 35% less than previous years, which means around 30 million tonnes less, 35-40% less, almost half of the previous year harvest,” Vysotskyi said.
The deputy minister also said that an estimated 500,000 metric tons of grain have been stolen by Russia in territories controlled by Russian forces.
As U.S. consumers cope with the highest levels of food-price inflation in 40 years, the situation throughout the developing world is even more distressing. West Africa is facing its worst food crisis in a decade, with the number of people in need of emergency food aid standing at 27 million in April and rising fast. Another 13 million face severe hunger in the Horn of Africa, and as many as 19 million will be food insecure in Yemen by the end of this year. Europe fears another mass migration crisis sparked by food shortages in Africa and the Middle East. Sri Lanka, once more prosperous than its neighbors, applied last month for 100,000 metric tons of food aid from a regional food bank as its debt crisis threatens to leave millions hungry.
This global emergency has multiple causes, from climate change to COVID-related supply-chain disruptions, but one event affecting all these far-flung countries is Russia’s invasion of Ukraine. On top of all the damage it has already done in just over 100 days, that crisis is now wreaking more and more havoc on the global food supply. The war has cut off the flow of agricultural exports from one of the world’s major breadbaskets, driving up global prices of wheat and other staple crops. It is also raising the cost of fuel and fertilizer, threatening the livelihoods of farmers around the world. The United Nations World Food Program estimates that an additional 47 million people will experience acute hunger in the coming months, mostly in sub-Saharan Africa, if the war continues unabated. The compounding crisis isn’t just exposing some alarming vulnerabilities in the global food system, it’s also demonstrating how unprepared the world is to withstand the inevitable additional crises to come.
[As] is the case with most famines throughout history, the problem is not a lack of food but rather a lack of access to it. Russian forces have occupied the country’s southeastern breadbasket and coastline, leveled the port city of Mariupol, and continue to threaten the main port of Odesa in the southwest. Ukraine has also laid mines in the sea to defend Odesa against a naval assault, which additionally hampers shipping. Without the ability to ship grain via the Black Sea, Ukraine’s infrastructure minister told the Financial Times that the country can move less than 20 percent of its normal grain exports via other routes — maybe 30 percent with an all-out scramble to improve other transport options. Even if Ukraine could get its grain into Poland or Romania for shipment outside Europe, these countries’ seaports wouldn’t be able to handle the volume. Additionally, Russia has seized hundreds of thousands of tons of wheat and bombed farms, grain silos, and many of the road and rail links Ukraine might otherwise use to export grain overland.
[If] the war were the only pressure point on the grain supply chain, that might be survivable, but it happens to be occurring at the same time as other major grain producers are struggling with ruined harvests and production shortfalls. India, which had previously offered to help fill the gap in wheat exports caused by the war, suffered a record-breaking heat wave in April that damaged crops and caused domestic food prices to surge. In response, the Indian government reversed its offer to alleviate the global market and banned wheat exports in mid-May instead. China, too, is looking at a diminished wheat harvest because of several factors, including flooding last autumn and recent shortages of fertilizer, seeds, and labor caused by the country’s stringent zero-COVID lockdown policies. Extreme weather, much of it attributable to climate change, is hurting wheat production in other countries, including France, Canada, and the U.S. The only good news in the global market for staple grains is that rice appears to be okay.
Obstructing international trade in staple foods at a time like this is nothing short of criminal. Unfortunately, it may also be terrifyingly effective at getting Putin what he wants. Fears of a continuing and growing food crisis are among the main drivers of “realist” arguments that the Biden administration and its NATO allies need to find a way to end the war as soon as possible at any cost — even if that means forcing Ukraine to capitulate to whatever price Putin demands for a cease-fire — just to get the wheat flowing again. That outcome would be unacceptable to the Ukrainian people, and if Putin succeeds at extracting concessions by holding the grain supply hostage, he will certainly do so again the next time he invades Ukraine — when he would have an even easier time closing off the Black Sea shipping lane. This is not a precedent Biden and his fellow NATO leaders want to set.
Fortunately, there are things the U.S. and other rich countries can do to help alleviate this crisis without giving into Black Sea blackmail. It bears repeating that the world is not actually suffering from a shortage of food but rather a series of obstacles in getting it from the places it is grown to the places it is needed. To solve that problem, world leaders either need to unblock Ukraine’s exports (a difficult task at the moment), facilitate alternatives, or help import-dependent countries produce more of their own food. The U.S., international banks, and development organizations are allocating tens of billions of dollars toward supporting farmers, agricultural development, and addressing the fertilizer supply crisis. At the beginning of this month, Agriculture Secretary Tom Vilsack announced a $2 billion plan to strengthen the domestic food-supply chain and help smaller producers compete with Big Ag. Canada’s government is also urging farmers to grow more grain to help feed the world.
[C]limate change and extreme weather are not going away. The weak links in global supply chains will not fix themselves, nor will this be the last time a bad actor exploits a supply-chain choke point to obtain leverage in a conflict. Governments and businesses need to take more active steps to make the global food market resilient to these ongoing threats. Those steps will come too late to help the people at risk of starving this year, but without serious action, we run the risk of famine becoming a regular feature of the human condition once again.
Rick Newman continues:
The OECD calls this a “cost of living crisis” and says, “The war in Ukraine has quashed hopes for a quick end to rising inflation from COVID-19 related supply bottlenecks seen across the global economy during 2021 and early 2022. Consumer price inflation will peak later and at higher levels than previously foreseen.”
The World Bank recently warned of global “stagflation,” with many countries falling into recession this year. The principal cause is Russia’s war. Most economists see slowing growth in the United States, but not a recession, given that unemployment remains extremely low. Europe, which is more dependent on Russian energy, will likely fare worse, and developing countries could face outright crises. A May report by the Eurasia Group and DevryBV Sustainable Strategies estimates the loss of food exports from Ukraine and Russia will boost the number of people suffering from food insecurity by 101 million toward the end of 2022, and the number living in extreme poverty by as much as 201 million.
Putin probably doesn’t mind, and some analysts think that destabilizing countries seeking to punish Russia with sanctions is part of his war strategy. Putin also probably knows it could get politically more difficult to keep sanctions on Russia when it causes painfully high energy and food costs for consumers not accustomed to such hardships. In that sense, the sanctions are a battle of attrition in which Russia hopes to show it can bear more pain, for longer, than the nations trying to punish it.
Here in the United States, Biden’s rhetoric about the Putin price hikes is growing more legitimate as the damage mounts. That may not help him, though. Polls show Americans do think Putin’s war in Ukraine is pushing prices higher, but they think Biden policies are the No. 1. cause [because GQP propagandists repeat this Big Lie incessantly and 99.9% of Americans know nothing about economics], which is a big reason for Biden’s weak approval rating. Russia, for its part, has inflation, too, with some consumer products costing 50% or 60% more than before the war. But it would probably have to get way worse than that for Putin, a dictator, to have any problem with the public.
Russia Putin can take the pain, for a while at least.