What the Ukraine Invasion is Doing to the US Economy

Since the pandemic began, high inflation has become a burden on the US economy. With the Ukraine invasion resulting in a surge in oil prices, it is more likely that inflation would get worse. Hence, the Federal Reserve might make the most unfavorable move to raise interest rates.

While the Fed is on high alert, President Biden already makes proposals aiming to diminish the effects of inflation. However, there is no quick fix. Neither the Fed nor President Biden has the necessary means to prevent the price hikes.

The US economy has been dealing with high inflation for almost 40 years. Due to the continuous price increases, a normal American household wants to spend more. Say a typical household spends less than $70,000 a year. They need to spend $275 more per month to buy the same goods they did the previous year.

According to 17 Nobel prize-winning economists, President Biden's Build Back Better Agenda will ease longer-term inflationary pressures on our economy.

Yet, Republicans are standing in the way of bringing down prices for their constituents.

— Jaime Harrison (@harrisonjaime) February 18, 2022

Pandemic fueled the higher inflation rate. Aside from the significant effect on supply chains, the labor force is also greatly affected as millions of people get sick and work. While the pandemic is gradually easing, the high inflation will also drop. However, it will take years before it can come back to normal. With the threat of the Ukraine invasion just around, the inflation rate might stay as is or get worse.

Oil Price Hikes

While Russia’s aggressive move of invading Ukraine is taking a human toll, it has also placed the global economy at high risk. The major commodity that greatly affects the US economy and the world is oil and natural gas. Ukraine and Russia are two of the biggest oil suppliers contributing bulk to the world market.

The rise of oil prices contributes more to the inflation crisis in the US economy. Since the Ukraine invasion, global oil prices have soared high, amounting to $110 per barrel. Although, at this point, other global supplies haven’t been affected yet, the threat is lurking. Once the supplies are greatly affected, oil prices can rise to more than $140 per barrel. Thus, leading to a price of $5 per gallon.

The two options for @JoeBiden to keep the US economy from collapsing for just a little longer. pic.twitter.com/fAauIkvJnr

— Kim Dotcom (@KimDotcom) March 3, 2022

If oil prices stay at $100 per barrel, Americans will pay almost $4 per gallon on a regular unleaded, a 60 cent increase. This will result in a decrease in the GDP growth from an estimated 3.7% to 3.5%. At the same time, adding half a percentage point to the yearly consumer price inflation. A painful effect that could worsen the state of the US economy.

US Economy Effects

With the fear of increasing inflation, the Federal Reserve has no choice but to raise interest rates significantly. Before the Ukraine invasion, investors are already foreseeing rate hikes this year. Once the Fed pushes through with aggressive rates, it will be difficult for the US economy to adjust as any more rate increase can lead to the staggering of the US economy.

If the Federal Reserve has no other choice but to increase interest rates, this can trigger a “wage-price” spiral. In this case, workers will demand higher pay from their employees to keep up with the increasing price of goods. Then businesses will agree as they will expect to pass the higher expenses to their customers, and so forth.

It already happened in the 1970s and early 1980s. It didn’t end well with devastating double-digit inflation and a weakened economy. The Fed’s only move to break the wage-price cycle is increasing interest rates and driving the economy into recession.

On a positive note, President Biden has requested that the nation’s Strategic Petroleum Reserve be released to aid in the continuous higher oil prices. European and Asian allies are also doing the same. This can provide an additional 60 million barrels to international markets. However, this won’t have much impact on the prices.

The effect of the Ukraine invasion is taking an unmeasurable toll on the Ukrainian people. Everyone in the world is hoping the conflict can be resolved soon. While the assurance for the decrease of high inflation is very unlikely, hopefully, the US economy and its recovery will happen soon.