Mark Zandi’s Take

At CNNMoney Moody’s Chief Economist Mark Zandi considers the implications of the war for the U. S. economy:

Russia’s invasion of Ukraine complicates things further, ensuring the pain of inflation is set to get worse and last even longer. Global oil prices have risen dramatically since the invasion began to more than $110 per barrel. Even though global supplies have not been significantly disrupted by the Russian invasion, there is a considerable threat that they will be. The higher prices we’re seeing are a premium oil traders add to oil prices to compensate for this risk. If supplies are significantly disrupted, then we could see oil prices rise to more than $140 per barrel and gas prices rise to more than $5 per gallon.

But even assuming there are no supply disruptions, and oil settles in near $100 per barrel, then American consumers will still be paying more than $4 for a gallon of regular unleaded by this spring, according to my own estimate. If sustained, $100-a-barrel oil would ultimately add as much as half a percentage point to year-over-year consumer price inflation, based on simulations of Moody’s Analytics’ model of the global economy, which accounts for the impact of higher oil prices on the production and transportation of goods. That would cost American households another $50-plus per month in higher gasoline bills.

Also worrisome is that oil and gasoline prices play an outsize role in shaping the inflation expectations of global investors, businesses and consumers. Most of us purchase gas regularly and see the price each day as we go to and from work. Nothing influences people’s thinking about future inflation more than what they are paying at the pump today.

If inflation expectations start to rise, then the Federal Reserve will likely feel compelled to raise interest rates more aggressively. The Fed knows that if inflation expectations increase, then this may ignite a so-called wage-price spiral. That is, workers will demand their employers pay them more to compensate for the expected increase in their cost of living, businesses will agree to do so as they will feel they can pass the higher cost along to their customers, and so it goes.

He also makes this interesting observation:

Criticism that the administration’s efforts to address the threat posed by climate change is significantly contributing to the higher oil prices are specious. To be sure, the administration is working to make fossil fuel production less economically attractive and green energy investments more, but this will play out over years and decades.

I wish he had expanded on that more. Consider this chart:

from Macrotrends. To my eye it looks as though oil prices had recovered to their pre-pandemic levels by February 2021. Yes, there was a one month dip in November 2021 after which prices resumed their rise substantially. Only prices above $85/barrel can be attributed to Russia’s invasion of Ukraine. Am I reading that correctly?