The Fallout From Ukraine
You donât need us to tell you that Russiaâs invasion of Ukraineâand Western sanctions on Russiaâare playing havoc with your finances. Youâre reminded of the pain afflicting your pocketbook every time you fill your gas tank. But the impact doesnât end there. Americans are spending more at the supermarket, mortgage rates are higher, and investors have experienced big losses in their portfolios
Sanctions on Russia will exacerbate already high inflation, which reached 7.9% in February. Russiaâs main contributions to the world economy are commoditiesâoil, gas, wheat, nickel, aluminum, palladium. To the extent that sanctions cut off those exports, prices will climb still higher. For the global economy, this is the biggest hit since the onset of COVID-19. How bad will it get?
The Hit to Household Budgets
The average price of a gallon of regular gas breached $4 in early March, and gas prices were quickly heading higher. To add even more price pressure, on March 8, President Biden said he was banning all imports of oil and natural gas from Russia. The United Kingdom also announced a ban on all Russian oil products by the end of the year. European Union officials unveiled a separate plan to cut Russian gas imports by about two-thirds this year. Replacing all those lost barrels of Russian oil and refined fuels probably canât be done, at least in the near term, because Russia is the worldâs third-largest oil producer after the U.S. and Saudi Arabia.
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How high will the price at the pump go? No one knows for sure, but count on it rising further. Continued gains in crude oil and gasoline futures contracts will keep filtering through to the gas pump. Prices have surpassed AAAâs record average high of $4.11 per gallon, set in 2008âalthough to top the 2008 high in todayâs (inflation-adjusted) dollars, the national average price for regular unleaded would have to reach $5.25 per gallon. But if the conflict in Ukraine continues to worsen, and oil prices keep rising as a result of it, that figure could be in play this spring.Â
Some food prices have also spiked, and they will continue to. Russia and Ukraine together account for about 20% of global corn exports and 25% of wheat exports, as well as the vast majority of the worldâs sunflower oil. Russia is also a top supplier of fertilizer.
What the Ukraine War Means to Your Investments
Stocks have gone up and downâbut mostly downâsince the invasion. In late February, the broad stock market, as measured by the S&P 500 index, fell into correction territory (typically defined as a drop of 10% to up to 20%) for the first time since 2020, and by early March, as Vladimir Putinâs troops made greater incursions into Ukraine and captured nuclear facilities, the tech-heavy Nasdaq entered a bear marketâmore than 20% off its peak.
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But stock investors would be wise to keep calm and carry on, market strategists say. History shows stocks usually take global saber-rattling events in stride. And a well-maintained portfolio should weather such storms over the long haul, especially if you remain patient while also taking advantage of the opportunities that the market offers.
Inflation Will Be Hard to Avoid
For the Federal Reserve, a tough job just got a lot tougher. Rising energy and agricultural prices exacerbate worries about inflationâa top-of-mind anxiety for Main Street, Wall Street and the Federal Reserve alike. The Fed needs to rein in already-high inflation, which would mean raising interest rates aggressively to counteract the inflationary effects of the Ukraine invasion. But the central bank might be loath to raise rates too quickly, especially during times of geopolitical turmoil, lest it choke off economic growth and push the U.S. into a recession. Kiplinger expects the Fed to lift rates, but more cautiously than it had intended. That raises the risk of even worse inflation in coming months.Â
Look for U.S. inflation to stay higher for longer than initially expected, ending the year at a still-high 6.5%. Food and energy will likely be the main culprits.