Rising energy prices and supply chain problems on a global scale, with few exceptions. This impact of the war in Ukraine, however, does not affect everyone equally. In Europe, it has a more direct impact due to its geographical and commercial proximity to the countries in conflict. The great dependence on Russian gas is the main headache. It is not being possible to reduce that energy connection as fast as, in theory, it should be under the sanctions against Russia. The scant European energy planning —with its exceptions— makes it necessary to keep the Russian gas tap open to avoid an energy collapse. It does seem appropriate to set tariffs to discourage it. European dependence on Russian oil is significant, but minor. It is easier to find substitutes in other countries. Many advocate outright banning the purchase of Russian crude. In Europe —with most countries far from full employment— inflation is basically explained by rising costs, rather than by the strength of demand. With cost inflation, the effectiveness of monetary policy to combat it is notably less.
The US is in a different position, even though its economy is suffering. Basically, it has the gas and oil it needs. Of course, it has been affected by the tensions in the supply chains. The big difference with Europe is that inflation is emerging there largely due to the impact of geopolitical tensions and energy and supplies on an economy with practically full employment (3.6% unemployment) at the end of the phase acute of covid. This is what Jerome Powell has pointed out in his public interventions: there is considerable upward pressure on wages that can exacerbate inflation. This would explain the Fed’s much more aggressive reaction to interest rates, with one hike already in place and many others expected this year. In any case, they would leave rates in real terms still negative.
The Fed seems to be more concerned about inflation than a sharp slowdown. However, the increase in debt associated with this policy can put vulnerable American companies and families on the ropes. The Fed will have to measure its steps very well. Going too far when raising rates can be a deflationary factor, but the consequences on the real economy must be measured.
Finally, inequality worsens in this crisis. Europe has a more complete welfare state than the US, but it remains to be seen whether the higher energy bill that Europeans will have to pay does not generate problems of inequality for those who cannot afford it. The excess savings that had been mentioned so much with the pandemic is now reduced because the cost of this crisis for families is going to eat up a large part of it.
He knows in depth all the sides of the coin.
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