How The War In Ukraine Could Hurt The U.S. Economy

WASHINGTON ― Russia’s war on Ukraine could spike gasoline prices in the U.S., increasing overall inflation as well as the odds of a layoff-inducing slowdown.

“Recession risks later this year and into next are now uncomfortably high,” Mark Zandi, chief economist at Moody’s Analytics, said in an email.

The Federal Reserve will try to stem inflation by hiking interest rates this year, making it more expensive to borrow money, meaning less for people to spend on goods and services. Skyrocketing gas prices could prod the Fed into more aggressive monetary “tightening” than it has already planned.

“The odds that the Fed missteps, and tightens too aggressively are material and rising,” Zandi said. “Landing the economic plane on the tarmac was already going to be difficult for the Fed because of the pandemic and high inflation, but Russia’s invasion makes it more likely the economic plane hits the tarmac hard or even crashes.”

For the past week, President Joe Biden has been warning Americans that a war would affect their pocketbooks. Biden said Thursday that oil and gas companies shouldn’t “exploit this moment to hike their prices” and that the administration would consider tapping the strategic petroleum reserve.

“I will do everything in my power to limit the pain the American people are feeling at the gas pump,” Biden said.

At $3.54 per gallon, gas prices are at the highest level since 2014. Democrats in Congress had already suggested suspending the federal 18-cent-per-gallon gas tax, though many lawmakers and policy experts have panned the idea.

Gas prices rose modestly this week but will eventually catch up to surging oil prices as a result of the war, according to economists and industry watchers.

“Pump prices will likely continue to rise as crude prices continue to climb,” the American Automobile Association said in a release Thursday. “As the conflict escalates with more sanctions and retaliatory actions, the oil markets will likely respond by continuing to increase the price of crude oil to reflect more risk of disruption to tight global oil supplies.”

Economic sanctions the White House announced this week target Russia’s financial sector and don’t block fuel exports, partly in an effort to avoid overly hurting European or U.S. consumers. Republicans renewed their calls for Biden to ease restrictions on domestic energy production, though such a move would be unlikely to have any immediate effect on gas prices.

Oil price spikes preceded recessions in 1973, 1981 and 2007. “Disruptions to oil markets and recessions have gone hand in hand throughout the post-war period,” the Congressional Research Service observed in 2010.

Of course, the bigger concern about the war on Ukraine is that innocent people are being killed as a dictator tries to overthrow a democracy. And Europe faces a worse economic threat than the U.S., not to mention a potentially unstable political future.

But the immediate economic impact on the U.S. could be significant, with major political implications as control of Congress is up for grabs in this year’s midterm elections.

Even before the war, many economists and financial analysts worried that the Federal Reserve faced a difficult task in reducing inflation without slowing the economy so much that millions of people lose their jobs.

As American Enterprise Institute economist Michael Strain wrote Thursday, “A surge in energy prices could require even more aggressive tightening than would otherwise have been the case, increasing the risk of the central bank accidentally tipping the economy into recession.”

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