“The growth drag from oil prices alone is about 0.2pp based on the move so far,” Goldman’s Joseph Briggs wrote, in an updated analysis of the prospective impact on the US economy from the conflict in Ukraine.
That drag would rise to more than 0.5pp if crude jumped to $150/bbl, a scenario Goldman called “a possibility in the event of further escalation or a longer supply disruption.”
The bank’s “rule of thumb” is that a 10% rise in crude prices boosts core and headline inflation by 3.5bps and 20-30bps, respectively (figure on the left, below). So, a surge in oil prices to $150 implies a boost to core PCE of nearly 25bps and a jump of more than 130bps in headline.
If that were to play out, it would raise the odds of the dreaded wage-price spiral, Goldman warned, “because near-term consumer and business inflation expectations are already very high and tend to be particularly sensitive to energy prices.”
Also “particularly sensitive to energy prices” are low-income consumers, who spend a much larger share of after-tax income on gas (figure on the right, above). That “K-shaped” inflation dynamic is even more pronounced when it comes to food. And that’s problematic because the war in Ukraine is also pushing almost all commodity prices sharply higher. In fact, this week witnessed the largest jump in Bloomberg’s spot index on record.
“Aside from direct trade impacts, Russia and Ukraine are major exporters of several metals and agriculture commodities globally, which could spill over to US domestic prices,” Goldman said, citing industrial metals and agricultural and livestock, indexes for which have skyrocketed (figure below).
Goldman sees limited inflation risk in the US from industrial metals, but Briggs warned of “a modest inflation boost from rising agricultural prices.”
Specifically, there’s a ~10% pass-through from the index shown above to food inflation, which means the near 20% jump agricultural commodity prices this year could add around “1.8pp to both PCE and CPI food price inflation and 15bp to headline PCE and CPI in 2022,” Goldman said, on the way to noting that “if prices of corn and wheat were to increase further… we estimate that the boost to headline PCE and CPI would increase to over 20bps.”
Remember, food prices have risen steadily for months in the US (figure below).
Ultimately, it’s impossible to make precise measurements, but Goldman tried. The overarching takeaway was that there are “clear risks of larger effects… should commodity prices increase further and particularly if the conflict escalates.”
On the growth front, Goldman modeled a 0.5pp hit to real PCE and a 0.3-0.4pp hit to GDP from the sentiment channel and said the war could also tighten financial conditions. Again, the broader takeaway was somewhat ambiguous, which is totally appropriate given the impossibility of predicting how far the conflict might spiral.
“Taken together, our estimates imply a moderate 0.2-0.4pp drag on growth under our baseline outlook,” Goldman said, cautioning that “risks are clearly skewed toward a larger drag, particularly if oil prices rise further or if tighter sanctions or an escalation in the conflict leads to a broader global growth slowdown that spills over to the US.”
I want to leave readers will an excerpt from a JPMorgan note mentioned here on Thursday. When you ponder the pass-through from crude to the US economy, consider it in the following context (from the bank’s Natasha Kaneva):
Given the supply shock and barring a breakthrough in peace negotiations, an immediate demand destruction is the only way to rebalance the market in the short term. So large is the immediate supply shock that we believe price needs to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes. This could result in a 1.2 mbd hit to this year’s demand, bringing 2022 oil consumption 550 kbd below 2019 levels. Crucially, were disruption to Russian volumes to last throughout the year, Brent oil price could exit the year at $185/bbl, likely leading to a massive 3 mbd drop in global oil demand. Key to this significant upside is the assumption that even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year given labor and infrastructure constraints.
If Garry Kasperov is correct, we ain’t seen nothin’ yet, and WWIII may have already begun…
https://www.reuters.com/world/europe/kasparov-calls-world-powers-throw-russia-back-into-stone-age-2022-03-03/
I don’t see that the linked article mentions WWIII. Did I miss something?
Kasparov mentions it at the outset of the video. It’s one of the first things he says.
Russian roulette with nuclear plants, terrorism and the core weapon of geopolitical oil. The looming inflationary impacts of spiking energy costs after a global pandemic increases Putin’s success in causing widespread instability and fragility.
Unfortunately the only way to slow down this avalanche is to starve Putin’s cash flow and totally destroy his ability to trade oil and destroy partnerships with countries that are willing to support him. We have be willing to face the reality of that cost, but choice is there?
Meanwhile:
It now costs about $3.5 million to hire a tanker to deliver a million barrels to Italy from Russia’s Black Sea port of Novorossiysk — a voyage that should take no longer than a week. That’s a more-than 300% gain from before the invasion of Ukraine began.
Meanwhile, India is hard at work creating special purpose vehicles to help Putin…. Not good!