Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. - Ronald Reagan
As if inflation wasn’t already on everyone’s radar screen, Russia’s invasion of Ukraine has elevated inflation fears to levels we haven’t (or, at least, I haven’t) experienced since the 1970s when I, as a teenager in Denmark, could ride my bike on the local highway on the car-free Sundays. That was one of the more intriguing ramifications of high inflation back then. Far less amusing was it when, a few years later, I moved away from home and had to pay 19% in annual interest on my first mortgage. Only a few of the young people I have shared this story with actually believe me!
Now, fast forward to 2022. The Russians are destroying a peaceful country, and the West has responded with powerful sanctions. These sanctions have already had, and will continue to have, a drastic impact on energy prices. Consequently, many OECD countries will, in a few months’ time, be flirting with inflation levels that, only weeks ago, were considered unthinkable.
Take for example the United Kingdom. Consumer price inflation in the UK is already 6.2% (as of February 2022, i.e. before Russia invaded Ukraine), and the economists at Bloomberg now think it will hit 10% in the next few months (Exhibit 1). As you can see, the Bank of England have somewhat lower expectations, but don’t forget that BoE have a vested interest in not raising inflation expectations.
Virtually all countries around the world are affected by the war but some more than others. From a national security point-of-view, the USA may not be that affected but, from an inflation point-of-view, it is. Tight labour markets had already begun to have an impact on inflation, and the invasion has only made it worse.