Ukraine conflict could push US inflation to 10% a year, analysis shows

The cost of living in the United States is already considered very high. The Russia-Ukraine crisis could get even worse.

Oil prices have jumped well above $90 a barrel in recent weeks as the risk of a Russian invasion increased.

If the Russia-Ukraine crisis pushes oil to around $110 a barrel, US inflation would exceed 10% year on year, according to a new analysis by RSM shared exclusively with CNN.

The US economy has not experienced 10% inflation since October 1981, according to government statistics.

“We are talking about a real short-term shock,” said Joe Brusuelas, chief economist at RSM.

Russia is the world’s second largest producer of oil and natural gas and global oil supplies. And this crisis comes at a time when the world energy market is already struggling to keep up with demand. JPMorgan warned that any disruption to Russian oil flows would “easily” send crude to $120 a barrel.

“Heating the house and putting gas in the car will become more expensive soon after the Russian invasion,” Brusuelas said, adding that there will be a “shock in consumer confidence” and a decrease in corporate investment.

US oil prices hit $95 a barrel on Monday for the first time since 2014. But crude reversed course on Tuesday, falling below $92 a barrel in hopes of a de-escalation between Russia and to Ukraine.

The current rate of inflation – consumer prices rose 7.5% in January from a year earlier – is the highest since February 1982. The high cost of living weighed heavily on consumer sentiment, which fell earlier this month. to a new decade low.

Pump prices have been a sore point. The national average for regular gasoline hit $3.50 a gallon on Tuesday, up from $3.46 a week ago, according to the AAA.

Brusuelas estimates that an increase of approximately 20% in oil prices to about US$110 would raise consumer prices by 2.8 percentage points over the next 12 months, pushing inflation above the 10% threshold. This would run counter to current expectations that inflation would gradually cool from high levels.

However, the impact to the wider economy may be less dramatic.

Brusuelas estimates that a jump to $110 for oil would shave a little less than a percentage point off US GDP next year.

Still, rising inflation would likely put renewed pressure on the Federal Reserve to step up its fight to keep prices in check by significantly raising interest rates.

“This would cause the Federal Reserve to accelerate the pace of policy normalization. You would hear more about a 50 basis point hike,” Brusuelas said, referring to recent calls for the Fed to raise interest rates by half a percentage point in a single meeting for the first time since 2000.