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To reduce persistent inflation, we must solve the Russian-Ukraine conflict

Commentaries & Views

Tomorrow the Labor Department will release its latest report on "headline" inflation. Headline inflation differs from core inflation in that it includes food and energy costs. It is been food, energy, and housing costs that have greatly impacted the day-to-day lives of lower- and middle-class citizens globally.

Economists, analysts, and market participants are laser-focused on the Labor Department's CPI (Consumer Price Index) report for June which will be released on Wednesday, July 13. The advanced forecasts released have a common theme or consensus, and that is that inflation will continue to run exceedingly hot. Expectations are that headline inflation which includes changes in food and energy costs rose 1.4% compared to the previous month and will come in at 8.7% YoY.

The Federal Reserve, and to a lesser extent central banks globally, have begun to raise interest rates in an attempt to reduce the spiraling level of inflation. However, it is a known fact and acknowledged by the Federal Reserve that regardless of how aggressive central banks tighten their monetary policy by raising interest rates and limiting the money supply it will not in any way shape, or form stop headline inflation from becoming persistent.

For too long the administration in the United States has been looking to the Federal Reserve to be the only component pressured to address inflation. This is a shallow solution to an extremely complex economic problem. More so, governments worldwide are aware of the fact that raising interest rates will contract the demand for nonessential goods and services. It does not address reducing the cost of day-to-day necessities such as food and energy.

The spiraling level of headline inflation began from pent-up demand as the pandemic ended its most severe stage on global citizens. By June 2021 the consumer price index was already running hot well over 5%. Supply chain bottlenecks that resulted from the pent-up demand of global citizens moved inflation to 7.5% in January. As those supply chain issues began to unwind in February Russia attacked Ukraine. The Russian-Ukraine conflict has had a dramatic impact on global inflation. This conflict choked the supply of agricultural exports by those two countries and fertilizer from Russia raising the cost of food globally. However, it is the free world's addiction to Russian oil and Russian fertilizer that had a profound impact on food and energy costs

The Russian invasion of Ukraine substantially elevated the risk of disruptions in the global fertilizer and oil exports from Russia. This conflict has had a huge impact on the price of oil. Because Russia is the second-largest exporter of oil it has led to the cost of crude oil moving above $100 per barrel. Russia is the world's largest exporter of fertilizer. They account for 23% of the ammonia exports 14% of the urea exports, 10% of process phosphates, and 21% of potential exports. This is according to data from the fertilizer Institute.

The high cost of oil and fertilizer has had the greatest impact on the production of food globally. The largest spikes in headline inflation have been food and energy costs. Therefore, it is logical to acknowledge that to bring inflation to acceptable levels we need to address the Russia-Ukraine war and come to the realization that without resolving this conflict we will not reduce inflation to an acceptable level.

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