That’s because the world economy and financial markets are interconnected. As Covid demonstrated, events on one side of the planet can set off shockwaves on the other side.
“The average American household is going to bear the burden of Vladimir Putin’s invasion of Ukraine,” said RSM chief economist Joe Brusuelas.
Hope remains for no invasion and that recent signs of de-escalation continue. If not, there are many ways American consumers could find themselves caught in the middle of this brewing conflict.
More pain at the pump
Oil prices have jumped in recent weeks to levels unseen since 2014 in part because an invasion of Ukraine could derail Russian energy supply.
Russia is an energy superpower, producing 9.7 million barrels per day last year, according to Rystad Energy. That is second only to the United States and amounts to more oil than Iraq and Canada produced — combined.
A dramatic spike in oil prices could be offset at least in part by consuming nations releasing emergency stockpiles and OPEC ramping up production.
Still, another pop in oil prices would lift prices at the pump, which lag behind move in crude prices. The national average price for a gallon of gas already stands at a seven-year high of $3.50 a gallon, according to AAA.
Oil prices retreated sharply on Tuesday on hopes that Russia and Ukraine will step back from the brink.
American inflation hasn’t climbed to 10% since 1981.
Not only would prices at the pump rise, but higher oil and natural gas prices would drive up home heating and electricity costs.
Higher energy prices would make it more expensive to fly and keep transportation and input costs elevated for businesses already grappling with surging expenses. Businesses would most likely pass along at least some of these higher costs to consumers in the form of price spikes.
“All of this would occur at a time when commodity supplies are more stressed than they have been in a generation,” David Kelly, chief global strategist at JPMorgan Funds, wrote in a report on Monday.
Of course, inflationary pressures would likely be even greater for Europeans, given their proximity to the crisis and reliance on Russian energy.
Investors have been glued to the latest developments on the Russia-Ukraine crisis.
Investors famously detest uncertainty. It’s easy to see how a full-blown invasion of Ukraine would trigger a knee-jerk selloff in stocks as investors confront the possibility of an oil shock, higher inflation and a confusing sanctions regime.
A prolonged market downturn would wipe out wealth built up by families in the stock market and in retirement accounts. Market instability could also dent confidence among consumers and businesses alike.
Stocks do have a history of rebounding from geopolitical scares, although there is a relatively small sample size. And it’s impossible to say how markets would respond in the current environment.
Slower economic growth
A Russia-Ukraine conflict would threaten to slow down the US economy by worsening inflation and increasing uncertainty.
The RSM analysis found that a jump to $110 oil would dent US GDP by one percentage point.
That is not as dramatic as the impact to inflation, but it’s still significant given that the US economy has not fully recovered all the jobs lost during Covid.
Higher borrowing costs
If inflation spikes above 10%, the Federal Reserve would come under pressure to step up its fight to get prices under control.
That could mean a faster pace of interest rate hikes to cool off inflation.
The Fed could choose to shrug off intensifying inflation as just a temporary phenomenon driven by the Russia-Ukraine situation. However, that strategy did not work out well last year, with the Fed eventually abandoning its “transitory” description of Covid-related inflation.
Cyberattacks and more
US President Joe Biden warned Tuesday of the potential for Russia to lash out in a conflict through the cyber realm.
“If Russia attacks the United States or allies through asymmetric means, like disruptive cyberattacks against our companies or critical infrastructure, we’re prepared to respond,” Biden said.
A cyberattack is just one example of how the Russia-Ukraine situation could spill over into daily life.
“Wars evolve in unpredictable ways,” JPMorgan’s Kelly said. “No one should assume that they can see all the impacts of a war at its outset.”