As a group, politicians have their own way of explaining the news. They play down serious problems and paint a much brighter picture of the future than is warranted.
That’s why a lot of people were surprised by a statement released by the Biden Administration on March 10. It acknowledged widespread suffering from worsening inflation and indicated it wouldn’t be resolved any time soon.
In fact, the White House essentially agreed with the many economists warning that “significantly” higher inflation is on the way.
That’s the last thing anyone wanted to hear, because the current rate is already exceptionally high. The yearly inflation rate in February was 7.9% -- a multi-decade high; it may even be much worse than that. According to Shadow Stats economist John Williams, if inflation were still calculated the way it was in 1980, the rate would be above 15% -- nearly double the official number.
A significant part of the spike was caused by energy prices, and going forward they are expected to go even higher. “Energy and commodities prices will likely contribute substantially to inflation in the coming months,” according to the Council of Economic Advisers (CEA). The President’s ban on all energy imports from Russia will make this worse.
If even government sources are forecasting higher inflation, you can be confident it’s on the way. In fact, it is already starting to look like the “bad old days” out there.
Although oil is down sharply from the recent high, motorists are still seeing sticker shock at the pumps. Airlines have cut back on some flights because of fuel costs, truckers are adding “surcharges” to their regular prices, and many businesses are being forced to pass along the higher prices they are being charged.
“Fuel prices are going through the roof, so we have to charge more,” said John Migliorini, vice president of Lakeville Trucking in Rochester, NY; his diesel costs have nearly doubled to about $400,000 a month. “I’ve never seen prices jump this high, this fast.”
Another factor driving inflation is food; it too is skyrocketing. While both of these are important, there are important differences. When the price of oil or gas increases sharply, that can be resolved as soon as additional supplies reach the market or even, to some extent, just by reports of that happening.
Unfortunately, bringing the price of food down to an affordable level is not as simple. If a harvest is below expectations, it takes months until another one becomes available, and there’s no guarantee that one will be better, so the fallout could last for months or even years.
Meanwhile, the CEA is not the only one sounding the alarm. The UN said food could soon rise by 22%. Wheat, corn, cooking oil, fertilizer, barley, and various other grains are just some of the basics expected to get much higher price tags.
An article in The Economist said the US could get into an inflationary spiral «unlike anything we›ve seen.» It cited the Food and Agriculture Organization (FAO), which said up to 30% of Ukrainian wheat fields will not be harvested in the 2022-2023. Even if a ceasefire is reached soon, the consequences of the fighting will linger for months.
Sanctions are already hurting. Yahoo Finance says Europe and the US have frozen euros, dollars, and sterling held by Russia’s central bank, cutting them off from a large part of their reserves. They also can’t get spare parts supplies for aircraft, and for almost every private car, new supplies of servers or high-end chips.
In addition, software crucial for their oil and gas industry has been cut off, millions of Russian employees of Western companies are now out of work, and imports of all Western goods are now delayed, as are exports from Russia of oil and metals.
Getting Their Just Desserts
Many people support these sanctions, believing Russia is getting what it has coming. Whether it does or not, retaliation will be painful.
Before the war, Russia had the world’s fifth largest foreign exchange reserves, and its labor force of 70 million was the world’s sixth largest. Overall, its economy was ranked 11th largest in the world. It can’t be eliminated then from the global economy without major repercussions, which will extend far and wide.
Major industries are already hurting from shortages of chips, and Russia’s retaliation to sanctions and the ongoing fighting will exacerbate this. Both Palladium and neon are necessary to make chips. Russia supplies over 40 percent of the world’s palladium and Ukraine produces 70 percent of the neon. If the sanctions and fighting drag on, the global chip shortage will worsen -- and virtually every industry uses equipment that contains computer chips.
Many US and other western companies have announced that they are pulling out of Russia, a move that will further disrupt their economy. But in response, Russia may seize all of their assets, including offices, warehouses, factories, inventories, and bank accounts -- without offering any compensation.
According to CNN, very little of the estimated $121 billion Russian businesses owe to international banks will ever be repaid. Russia has also compiled a list of 200 items used in agriculture, telecom, medical, transportation, and many more industries it will stop exporting. Production and availability of many of these already have been interrupted.
The bottom line is that prices will be sharply higher a year from now and there could be serious shortages of numerous items. Most foods are still readily available, but as food already in the pipeline is consumed, serious shortages could become evident.
The world is facing a situation it has never experienced before: A global experiment of sorts that will show how much pain individuals can endure without cracking and how much stresses and pressures economies can withstand without collapsing and descending into lawlessness.
By the time this is over, we will have learned a great deal about ourselves and about economics. Let’s hope we won’t be shocked by what we discover.
Sources: bloomberg.com; foxbusiness.com; theeconomiccollapseblog.com; theeconomist.com; washingtonexaminer.com