The chief economist at Moody’s Analytics is making waves for an assertion that the war in Ukraine is responsible for for as much as a third of US inflation.
In an analysis of the May inflation numbers, which rose to a four decade high of 8.6%, Mark Zandi broke down the underlying causes in a twitter thread over the weekend. The chief cause he cited was the Russian invasion of Ukraine, to which he attributed a 3.5% year over year increase in consumer price inflation registered in May.
Zandi wrote, “The Russian invasion and spike in oil and other commodity prices is the No. 1 reason, followed by the pandemic & the housing shortage.” He attributed 2.8% of that increase to the invasion driving up commodity prices.
Although he cites the Bureau of Labor Statistics and Moody’s Analytics as sources for his data, he does not detail how he calculated the exact numbers. Instead he linked to a podcast featuring Moody’s Ryan Sweet, a senior director, and Cristian deRitis, the deputy chief economist discussing the analysis with Zandi.
Sweet said, “The primary culprit was higher energy prices, particularly gasoline, and a lot of that can be traced back to Russia’s invasion of Ukraine that caused global oil prices to spike.”
Zandi noted, “It’s led to higher diesel prices, which causes food prices to be higher, and it’s also bleeding into things like airfares.”
Zandi attributed about 2% of the year over year rate to the COVID pandemic disrupting supply chains and reducing the supply of goods, and another 2.3% to underlying inflation..
He added, “At an estimated 2.3%, it is consistent with the Federal Reserve’s inflation target. It suggests that if not for the factors accounted for in the analysis, inflation would currently be near the Fed’s inflation target… Often-touted reasons for the outsized inflation, such as stiff regulation of the fossil fuel industry, strong money supply growth, and corporate greed are not playing a significant role in the high inflation. Ditto with the American Rescue Plan.”
Zandi dismissed the propositions of other economists like Steven Rattner and Larry Summers, that the $1.9 trillion American Rescue Plan, with its $1,400 stimulus checks had anything to do with inflation. He also dismissed energy regulation or money supply as having any effects.
He concluded, “If you buy into this analysis, it suggests that inflation will peak when the fallout of the Russian aggression on oil/commodities is behind us. No one else seems likely to sanction Russian oil, and the pandemic-related disruptions are fading. Inflation should thus moderate meaningfully by this next year.”
However he does say the issue of affordable housing will not get resolved so quickly, and that, “inflation won’t be fully back in the box until mid-decade.”
Writing in an op-ed, Zandi did caution that his views are dependent, “on the Federal Reserve getting monetary policy roughly right. That means raising interest rates fast enough and high enough to slow down the strongly growing economy and contain inflation expectations, but not too fast and high to push us into recession. This will require some deft policymaking, but so far so good.”
Other analysts and economists have pointed out however that his timing on when the Russian invasion affected prices may be off, as Russia did not invade Ukraine until February, and prices had already been rising at that point.
Zandi countered, “Global oil markets began to anticipate a Russian invasion of Ukraine in December 2021. Oil prices were close to $70 per barrel and falling when a Russian invasion began to become a significant possibility. Moreover, the analysis includes the impact on inflation of oil and range of other commodity prices, including prices for agricultural prices, metal, and gases, that are exported by Russia and Ukraine.”
Others, like Kyle Pomerleau, a fellow for tax policy at the American Enterprise Institute, questioned the completeness of Zandi’s analysis. “A war can increase commodity prices, but shouldn’t that also make people worse off and translate into less price pressure elsewhere? Same Q for labor shortages,” he wrote on Twitter Monday. “Seems like there has to be something on the demand side going on!”
Meanwhile, Jason Furman, former presidential economic adviser under Barack Obama, asked: “How do these factors explain rising shelter or wages?”
Zandi replied, “The affordable housing crisis captures the impact of accelerating rent growth. Labor shortages capture the impact of accelerating wage growth, but it’s small, as for the most part wage growth is being driven by inflation and not vice versa. At least so far.”
Photo of Mark Zandi courtesy of Wikipedia
