Gasoline? Up. Natural gas? Up. Wheat? Up. The spending power of your bank account? Down, down, down.
The U.S. has been experiencing inflation at the highest level in more than 40 years, reaching a 7.9% annual rate in February, and Russia’s attack on Ukraine is making matters even worse.
When the COVID-19 pandemic hit, the government poured money into the economy to pull it out of recession. As people hunkered down to avoid the virus, supply chains faltered and demand shifted from services to goods. Prices for all kinds of stuff shot up as a result.
Now comes the Russian invasion, at an especially vulnerable time for global commerce.
Even though Russia’s gross domestic product is smaller than South Korea’s or Canada’s, it is the No. 3 producer of oil and a big supplier of other raw materials. Europeans depend heavily on its exports of fossil fuels. Its industrial metals also are crucial.
Sanctions aimed at isolating Russia have disrupted world trade and sent commodity prices soaring to an extent unseen since the oil crises of the 1970s. Europe may need to ration heating fuel and gasoline. Poorer countries, sadly, could experience food shortages and even widespread hunger.
What to do? First, resist the temptation to mess with financial markets. That goes for everyone, up to and including President Joe Biden, who faces low approval ratings and a midterm election that’s shaping up badly for his fellow Democrats.
In the past, politicians unhappy with market forces have tried to thwart them by imposing new price limits, which undermine confidence. Worse still would be price controls, which don’t work and undermine confidence even more.
The markets are doing their job of matching buyers and sellers at the prices each side is willing to accept. We’ve even seen some rebounds lately. Let the markets be.
So far, the Biden administration has taken only a few, mostly ineffective, steps to blunt inflation. The White House has warned energy companies against price gouging while at the same time cheerleading for increased domestic production. It also coordinated the release of emergency petroleum reserves with U.S. allies.
Democrats in Congress have proposed waiving the federal 18.4 cents a gallon gasoline tax until after the midterms, which sounds helpful on the surface. But history teaches us that temporary tax holidays can have disappointingly little effect on retail gas prices, since the sellers often just then raise their prices. So don’t look to that for much help.
On the diplomatic front, the administration has signaled support for a nuclear accord that could remove sanctions on Iran’s crude-oil production, potentially restoring 1 million barrels a day to the marketplace. Similarly, it may relax sanctions against Venezuela, which has enormous oil reserves.
Biden and Vice President Kamala Harris have doubled down on promoting electric vehicles and green energy sources as an alternative to pricey oil and gas. Europeans are far ahead of the U.S. on that climate-friendly path, and likely to move even faster now.
While those steps could help in the future, they will make little difference today. It’s not as if Europe can rip out its natural gas-fueled boilers and replace them with electric heat overnight, or permanently park its gasoline-powered cars. About all we can reasonably expect is conservation, which is a natural, market-based reaction to sky-high prices.
For the U.S. economy, the next step is needed ASAP: higher interest rates.
The U.S. Federal Reserve has a “dual mandate” to promote full employment and control inflation. The job market is hot, so the central bank has room for maneuvering on that side of the ledger. The Fed has been slow to address inflation, however, and now Russian President Vladimir Putin has backed it into a corner.
Fed Chair Jerome Powell told Congress he will push for a quarter-point increase in the federal-funds rate when the Fed’s policymaking committee meets next week. That’s just for starters.
Chicago Federal Reserve Bank President Charles Evans recently told CNBC that the central bank should increase its base rate to as high as 2% by the end of this year, which would require a rapid series of interest-rate hikes.
Jacking up rates to that extent would be strong medicine against inflation, but it also would put a damper on economic growth. No wonder the stock market has taken a hit, and analysts have cut back bullish forecasts. America and Europe are fighting an economic war and, inevitably, their citizens will pay the price.
Russia’s brutal assault on Ukraine has no silver lining, but lessons can be drawn from it. First, Putin has revealed himself to be a danger that must be confronted, despite the clear economic costs. Europe, especially, needs to reorient its economies to keep Russia isolated. It is heartening to see alliances strained under the Trump administration being shored up to enable a unified effort against Putin’s aggression.
Most heartening is the brave example of the ordinary people of Ukraine. For generations, Ukrainians were denied the freedom that Americans have long enjoyed. Given their current life-and-death struggle against aggression, it is small-minded to moan about the price of gasoline at the local pump or groceries at the supermarket.
Let’s hope our country can follow the Ukrainian example and pull together to protect democracy, even at $4-plus a gallon.
— Chicago Tribune (TNS)
