The relentless march of inflation to the drumbeats of war
Some of it was the war. Some of it was the response to the war. All of it landed on top of an inflation that was already the highest in forty years.
By April 2022 inflation was no longer a forecast. It was the highest in four decades in the United States and the highest in a generation in Germany, and it had been building for a year before a single Russian tank crossed into Ukraine. What the war did was add a second engine. Sanctions imposed in response to it, and shortages caused by it, pushed producer costs up in the categories that eventually become everyone’s cost of living. This is a record of where the pressure was coming from in the sixth week of the war, sector by sector, because producer costs today are consumer prices tomorrow.
Oil
Oil touches the price of almost everything, and no relief was on offer. Saudi Aramco raised its official selling prices for every region in April, lifting Arab Light for Asian customers to 9.35 dollars a barrel above its benchmark, a jump of 4.40 dollars in a single month and a record premium. The benchmark itself was above 100 dollars.
Not all of the rise at the pump was the pass-through of higher costs. ExxonMobil signalled first-quarter results of close to 11 billion dollars, its highest profit since 2008, as the removal of Russian barrels from Western markets widened margins for anyone with supply of their own. Democrats in the House demanded that Exxon, Chevron, Shell and BP suspend dividends and buybacks for the duration of the war; Senator Ed Markey accused the companies of “profiteering off the crisis in Ukraine”. Whatever one thinks of the politics, the arithmetic was plain: shortages are good for business if the business has the thing that is short.
Food
The war’s most dangerous effect was not in American supermarkets. Russia and Ukraine between them supplied about 90 per cent of the wheat imported into East Africa, according to the United Nations World Food Programme, and the Horn of Africa was already in a drought that had killed livestock across Kenya, Somalia and Ethiopia and left an estimated 13 million people severely hungry before the invasion. France’s foreign minister, Jean-Yves Le Drian, warned that Europe had to prepare for an “extremely serious” global food crisis. A White House economic adviser said the administration was working with aid agencies because of the risk of famine in the Middle East, parts of Africa and the Far East.
Two mechanisms were at work. Grain that had been planted could not be exported through blockaded ports. Grain that had not yet been planted, in Ukraine and in every country that buys its fertiliser from Russia and Belarus, would be planted in smaller quantities or not at all. Fertiliser prices had already doubled in a year; American farmers were reporting the same. Aid money does not fill a field.
The pressure reached the rich countries as anticipation rather than absence. Spanish supermarkets, including Mercadona and Makro, began rationing sunflower oil in early March, and eggs and dairy ran short sporadically. Four national supermarket chains in Greece capped purchases of flour and sunflower oil, describing it as a preventive measure. Germany’s retail association warned consumers to expect a further round of food-price rises on top of an inflation reading that already recalled, for the older generation, the worst decade in the country’s monetary history.
Housing
The third heading of the original record was housing, and it marked a turn that later proved important. New-house inventory in the United States had piled up to its highest level since 2008 while sales fell, and prices of new houses had begun to slip even as the monthly cost of buying one soared with mortgage rates. Homebuilder shares were falling. A market that had been rising on cheap money was meeting the end of cheap money, and the first thing to give was volume.
The pattern
One calamity was arriving on the heels of another. The pandemic had broken supply chains through closed ports and locked-down factories; the responses to the pandemic had put more money into economies than they could produce goods for; the war then removed a large exporter of energy, grain and fertiliser from the market, and the sanctions removed more. Each shock landed on a system with less slack than the last one had found. Rationing in European supermarkets in 2022 was not the Second World War, but it was a sign of how little resilience had been left after two years of spending it.
Later note. Consumer price inflation in the United States peaked at 9.1 per cent in June 2022, the highest since 1981, and in the euro area at 10.6 per cent that October. Food-price inflation lagged and stayed higher for longer. The famine the White House feared was averted in most places by the grain-corridor agreement of July 2022 and by a fall in fertiliser prices in 2023, though not in the Horn of Africa, where the drought continued.