The Fight Against Inflation

Market Memo

March 2022 – By Kyle Rohrwasser

On February 21st Putin announced that Russia would recognize the sovereignty of the two western republics of Ukraine, which was immediately met with NATO sanctions. Quickly following, Russian forces moved deeper into Ukraine on February 24th. Within the week, technological, financial, and political sanctions had been handed out with intent to punish Russia for the occupation of Ukraine. See tracking sanctions against Russia here.

We are less than month removed from the date of invasion and the Russian economy is almost in shambles. Global companies are on a mass exodus from the country, the Ruble value freefalls, Russian markets have been closed to trading, and citizens are lining up at the banks to withdraw funds. These are precursors to massive and systemic economic challenges for Putin’s Russia. This has created a unique situation for the global economy, not only from the politically driven conflict potentials, but also the increased pressure on inflation it has triggered.

Oil prices rose to $125/barrel in early March due to concern of a global oil supply shortage. This has increased the short-term volatility and inflation expectations for all products. Higher transportation costs put additional pressure on all goods. Oil has come back closer to $100/barrel, but its effect on the cost of goods cannot be overlooked, especially as the Fed expects to raise rates. We have also seen spikes in other commodities such as wheat, neon, and nickel as the countries in conflict are large producers in those markets.

Last week reported the highest inflation rate in the last 40 years at 7.9%, a result measured prior to the recent dramatic move in oil prices. In response, the Federal Reserve is set to increase interest rates 25 basis points (0.25%) in March, with current expectations of 5 rate hikes in 2022 and 4 rate hikes in 2023. They will talk about potentially reducing the $9 trillion balance sheet as well, a move that could put additional upward pressure on rates. We have been in an environment of quantitative easing since 2008, but now entering a new world of quantitative tightening.

The ideal situation is that the Federal Reserve can cool inflation without slowing growth to the point of recession. If rate hikes are consistent and on schedule the expectation is that the market can handle it and price it out prior to the actual increases. As stated last month, it is encouraging that the Federal Reserve has demonstrated that they are willing to pivot based on economic data quicker than in the past. Finding the happy medium of cooling inflation without slowing growth too much is difficult to do, but if successful, markets may rejoice.

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