Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Sanctions, trade wars worsen US inflation

Economics / Protectionism May 16, 2022 - 03:52 PM GMT

By: Dan_Steinbock

Economics The Fed’s aggressive and belated rate hikes will escalate economic challenges in the US and elsewhere, thanks to ill-advised sanctions and trade wars.

Recently, the Federal Reserve lifted its benchmark interest rate by half a percentage point, to a range of 0.75%-1%, following a smaller rise in March. It was the Fed’s biggest increase in 22 years.

Last fall, Jerome Powell, the Fed chairman, still characterized rising prices as "transitionary" which would not leave “a permanent mark in the form of higher inflation.”

So, when inflation began to climb rapidly after mid-year 2021, the Fed ignored it until it soared.             

40-year-high inflation driven by commodities and trade wars        

In March, US inflation rate accelerated to 8.5 percent; the highest since December 1981. In part, it was fueled by energy and food prices; in part, by the consumer price index (CPI), which shot to 6.5 percent, the most in four decades.

Typically, the rapidly-increasing energy and food prices are being attributed to the Ukrainian crisis. Effectively, they should be associated with economic sanctions that have turned a regional conflict with a limited, short-term trajectory into a global crisis with a broad, protracted horizon. That's the net effect of the hybrid proxy war in Ukraine.

Excluding volatile energy and food categories, the soaring inflation has been associated with pandemic-induced global supply disruptions and the recent COVID-19 outbreaks in China. Reportedly, new cases peaked in China in late April and are now coming down.

But disruptions in global supply chains may penalize global economic prospects as long as the failed efforts to contain the virus in the West continue to give rise to new waves of variants.

Energy and food shocks, prelude to more global pain               

Commodity prices peaked in early March, remain close to the peak level and have soared 39 percent since the beginning of the year. Food prices climbed to an all-time high in March, up nearly 20 percent year-on-year, and remain high in what UN Secretary-General Antonio Guterres has called the “hurricane of hunger and a meltdown of the global food system”, while crude oil price reached a high of $125 in early March, increasing 43 percent since January.

In Europe, the most exposed region to Russian energy, natural gas price quintupled to a high of 230 euros and has dropped to 104 euros, as concerns over Russian supplies have dissipated somewhat, but only temporarily.

Russia is the world's 11th largest, $1.8 trillion economy. It is the world's largest gas exporter and the second-largest crude oil exporter after Saudi Arabia. Goldman Sachs has warned that the global economy “could soon be faced with one of the largest energy supply shocks ever”.

A benign scenario in the Ukrainian crisis was possible, but it would have required rapid, proactive diplomacy. Unfortunately, that has not been the priority of the proxy war. As US defense secretary Austin acknowledged in late April: “We want to see Russia weakened.” It was a stunning admission.

Misguided trade wars derail global prospects, again                

Currently, the Biden administration is reviewing US tariffs imposed on Chinese products ahead of their expiration in July. Meanwhile, some policymakers are calling for reductions in order to provide relief to consumers struggling with rising prices. These calls are fueled by the fear of a potential Republican landslide win in the midterm elections.

The misguided trade wars against China and other large trading economies have caused irreparable harm by undermining global recovery since 2017. Currently, average tariffs on Chinese imports are levied at about 19.3 percent covering over two-thirds of all goods the US buys from China.

Yet, the US trade deficit has not shrunk, as the Trump and Biden administration expected. In March, it widened sharply to a record high of $110 billion, due to a broad-based rise in prices, especially as energy imports increased by 10.3% to a new record high of $352 billion.

The lessons are unambiguous. Unilateral tariffs can resolve neither multilateral challenges nor distortions in US domestic economy. In effect, recent research suggests that a trade liberalization policy equivalent to a 2-percentage-point reduction in tariffs could reduce U.S. inflation by 1.3 percentage points from the current rate.

Yet, the Biden administration’s priorities have been geopolitical rather than economic. That’s precisely why it has continued the Trump White House’s tariff hikes since January 2021.

Ironically, hoping to kill two birds with one stone, the Biden administration now blames “Trump’s tariffs” for the record high inflation. In a disingenuous face-saving measure, it hopes to reframe its economic failures to derail Republican advances in the impending mid-term elections.

Protracted policy mistakes, medium-term damage

“Has US inflation peaked?” the New York Times asked already 3 weeks ago. “Has US inflation finally started to slow?” seconded the Financial Times more recently. Recent headlines reflect optimistic but premature hopes that inflation peaked in March.

Yet, the Ukraine crisis is far from over, thanks to Biden's proxy war. Moreover, the bottlenecks in the global supply chains are yet to be cleared and could again clog supplies when new variant waves re-emerge.

These pressures are likely to weigh on commodity prices longer, particularly if the Biden administration opts for new, ill-advised trade wars and continued misguided sanctions. Meanwhile, the Fed’s aggressive and belated rate hikes are escalating economic challenges in the US and elsewhere. And these could worsen in July, when the Fed plans to start quantitative tightening by culling assets from its $9 trillion balance sheet.

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see  

© 2022 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in