How the war in Ukraine will fuel a sharp hike in inflation
Economists are warning Russia’s invasion of Ukraine will fuel a sharper rise in inflation, despite the rising cost of living having already hit the highest levels for three decades.
With Russia the world’s biggest natural gas exporter and second-largest for oil, the stakes are high in a global economy still hooked on fossil fuels – drawing parallels with the Yom Kippur war and oil price shocks of the 1970s which led to galloping inflation and economic crises worldwide.
Michael Strobaek, global chief investment officer at Credit Suisse, said the shock waves emanating from the Russian invasion amounted to the “dawn of a new world order” for the international economy, in which higher inflation and financial market volatility could be taken as given.
“Russia’s invasion of Ukraine marks nothing less than a shift away from the largely US/western-dominated world order that has prevailed since the fall of the Berlin Wall,” he said.
There are several channels through which an inflationary shock will ripple around the world:
European natural gas prices surged by almost 70% after the invasion of Ukraine, while the global oil price touched $105 for the first time since 2014. Although prices fell back on Thursday, they remain historically high – fuelling the prospect for a further rise in living costs.
Some countries are worse affected than others. Across the EU, Russian gas accounts for 40% of the energy supply, although in some nations such as the Czech Republic and Latvia it rises to 100%.
Germany has become more dependent on external sources of energy in the past two decades, rising to 67% – among the highest rates in the EU – as it scales back nuclear energy production. In terms of gas supplied from Russia, the country accounts for 65%
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