The result of the war has been a spike in these three key commodities. (And many others, as well.) To illustrate, the national average cost of gasoline recently hit a record high at $4.33 per gallon.
Prior to Russia’s invasion, inflation was primed to move lower. However, it’s now likely to worsen before improving in the second half of the year.
The consumer price index (CPI) hit a 40-year high in February, climbing 7.9% over the past year. Unfortunately, according to the Federal Reserve Bank of Cleveland, year-over-year inflation is tracking at 8.4%. Economists expect the CPI to drop in the months ahead, settling around 6% by year-end.
These higher prices will likely constrain consumer spending, which would hurt the US economy because consumer spending represents about 70% of the total economy. Europe will take a bigger economic hit because it relies on Russia for about 40% of its natural gas imports. Further, the geographic proximity of Russia could hurt Europe’s consumer confidence. That, in turn, would negatively affect growth.
THE FEDERAL RESERVE IS IN A TOUGH SPOT
The "dual mandate" of our nation's central bank is stable inflation and full employment. And while we are at full employment we are obviously far from stable in terms of inflation.
To fight inflation, the Fed increased short-term interest rates (known as the "fed funds rate") for the first time in three years on March 16. Moreover, the central bank indicated it would raise interest rates six more times this year. We observe the Fed’s intentions through the median, or middle, dot of the "dot plot."
The dot plot is a graphical representation showing where each Fed member believes the fed funds rate should be at the end of the upcoming calendar years. Market participants view the median dot as the Fed’s consensus opinion on rate hikes.