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Russian Sanctions and US Inflation: What You Need to Know

As tensions escalate between Russia and Ukraine over international borders and sovereignty, American consumers may soon feel the impact on their wallets.

Global markets fell after Russian forces invaded Ukraine early Thursday, with stock indices like the S&P 500 down 2.2% shortly after opening and the Dow Jones Industrial Average down 2 .5% (more than 800 points). The tech-heavy Nasdaq entered bearish territory for the first time since 2020.

Meanwhile, oil prices surged above $100 a barrel. Yields on 10-year US Treasuries fell below 1.9% and the price of gold jumped 0.8% on Thursday after rising steadily for weeks as investors flocked to safe havens .

All this movement in the markets was triggered in part by anxiety surrounding new sanctions announced by the White House against Russia – and the possibility that more sanctions are likely if the conflict continues.

Russia is a major oil supplier, which means sanctions against the country could have repercussions around the world. Although the conflict is far from the oceans – and at this point no one knows exactly what will happen – Americans will likely feel the pinch in their wallets thanks to rising energy prices and an uncertain global economy, says Kathy Bostjancic, chief US economist at Oxford Economics.

How do penalties work?

Economic sanctions are a way for a country or government to put pressure on another entity (whether another country, a company or an individual) without resorting to military force. According to Council on Foreign Relationsa nonpartisan think tank, sanctions can include trade restrictions, travel bans, foreign aid cuts, asset freezes, and more.

On Thursday, Biden announced a new round of sanctions against Russian banks and individuals as well as limits on Russian exports. The sanctions “will impose a significant cost on the Russian economy, both immediately and over time,” Biden said, and they follow another round of less severe sanctions announced earlier this week that were an unsuccessful attempt to prevent a full-scale military invasion into Ukraine.

The sanctions list — like a similar package imposed on Russia in 2014 — is designed to use economic pressure to make it harder for Putin to carry out an agenda the United States opposes.

“The world will hold Russia accountable,” Biden said in a statement Wednesday. He announced further consequences on Thursday in the form of tougher sanctions against Russia.

Will Russian Sanctions Affect US Inflation?

Inflationary pressures have rocked the global economy in the wake of the coronavirus pandemic and pushed prices up more than 7% in one year.

The crisis in Ukraine could push the inflation rate to more than 10%, according to analysis by the consulting firm RSM. The price of oil could reach $110 a barrel, which, combined with the impact on natural gas prices, consumer confidence and uncertainty, could push the inflation rate up 2.8 percentage points above its current level, according to the firm. Financial markets are worried about a disruption in oil supply to markets, pushing up the price of that oil, says Joseph Brusuelas, chief economist at RSM.

Russia is one of the largest oil and gas producers in the world, and any problems in these industries will be felt around the world in the form of rising energy prices.

“These prices are then passed on to downstream consumers,” Brusuelas explains. “So anyone who buys fuel oil for their home, puts gas in their car, or flies in a jet for work or personal reasons will feel the effects.”

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It’s not just oil and gas

Biden said Thursday it was “essential” for him to protect Americans from further pain at the pump. But rising oil prices are only the beginning of the potential ramifications for American consumers. Food prices could suffer, since Russia and Ukraine are both major exporters of wheat and maize. Prices for both commodities, as well as soybeans, soared on Thursday.

Rising energy prices could also make goods such as food and services such as plane tickets and public transport more expensive, Bostjancic said.

And if you thought supply chain issues were behind us, think again. Experts say the Russian-Ukrainian conflict could make matters worse.

The availability of raw materials produced and exported from Ukraine and Russia – from natural gas to wheat to iron and steel – could be disrupted, according to Chris Rogers, supply chain economist at the Flexport logistics, wrote it in a recent report. Insurance costs for shipping to the region may increase, and there is potential for cybersecurity attacks involving logistics companies, Rogers added. Expanding the sanctions, he wrote, could complicate customs and invoicing activities, especially for energy and metals-producing companies.

All of this is on top of the supply chain pressures that Americans have seen for months.

“We haven’t even come out of the last supply shock we were subjected to, which was the pandemic,” Brusuelas says. “It’s one shock on another.”

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Will the Fed delay rate hikes because of the Russian-Ukrainian conflict?

Federal Reserve officials have indicated for months that they plan to raise interest rates several times this year to help combat soaring prices and prevent the economy from overheating. But because the conflict in Ukraine has the potential to erode economic growth and depress consumer confidence in the United States, there has been speculation that the central bank may adjust its plans.

“That doesn’t rule them out,” Bostjancic said of the impact the Russian-Ukrainian conflict could have on the Fed’s next move. “They will still tighten but probably less.”

Oxford Economics now estimates that the Fed will likely raise interest rates by 25 basis points in March and not raise rates by 175 basis points for the whole year. Those numbers are down from its earlier estimate of a 50 basis point hike in March and a 175 basis point hike for the full year, Bostjancic said.

The main thing: everything is in the air

With the situation in Ukraine and Russia changing from hour to hour, it is difficult to predict what the future holds for inflation and the outlook for the US consumer. Some experts have raised doubts about the success of imposing sanctions on Russia, and estimates vary about the impact of the crisis on wallets around the world.

“There is a lot of uncertainty,” Bostjancic said. “We don’t know how long the conflict will last.

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