It’s now becoming very clear that the current conflict in Ukraine and the subsequent sanctions against Russia are starting to have a much more violent impact on prices, and that the effect will be a lot more prolonged and protracted than anticipated. (Listen to the podcast here).
We have already warned about inflation for quite a while and that was before the current conflict. Prior to the start of the current war, we were already warning that the pressures would be a lot more prolonged. We were concerned then that the energy transition to more renewable sources of energy would not be that easy. Now that the war and the sanctions are in place, that transition will be even more turbulent.
In the Euro area, the latest February data showed a continued increase in the annual percentage change of consumer prices from +5.1% in January to +5.9% in February. This is the overall index of course. When you only look at the energy component, that annual percentage change jumped to 32% in February after 28.8% in January. Of course, you have to take into account the basis effect that took place from the January and February 2021 base. Last year, right at the same time, energy prices were already starting to recover as the world economy was preparing to exit out of the pandemic. Oil prices were well below $100 within a range of $40-$60 a barrel. The war in Ukraine is now pushing these prices above $100, a mark that had not been seen since 2014.
As a result, we are now more concerned about the second round effect of these energy costs. It will not take too long for these increases to percolate throughout the rest of the global economy. You can see that as one of the seven sisters that we had mentioned in an earlier post.
But, according to us, the other one of the seven sisters has to do with our lifestyle, more particularly the lifestyle that, we in the West, have been used to over the last few decades. It’s a lifestyle built on fossil fuels. This crisis reveals how unprepared we all are in moving away from fossil energy. It is very clear that the inflationary pressure has a lot more to deliver than a simple transitory cycle that central banks will be able to squash with several rate hikes in the foreseeable future. Regardless of how creative Western Central bankers will be, their action will not be of much use if an entire reshaping of our lifestyles is not envisioned from the ground up. These were challenges that prevailed before the war even started.
Let me know if you have questions, and looking forward to talking to you. Feel free to comment and like.