Sanctions on Russia, a major oil supplier the European Union, could crimp its exports of the critical energy commodity, meaning oil prices are likely to rise, sending inflation up and making consumers think twice about spending on anything beyond the basics, Wells Fargo economists said.
Meanwhile, Germany this week halted the certification process for the Nord Stream 2 pipeline that shuttles natural gas from Russia to Europe’s largest national economy after Russian President Vladimir Putin sent troops into two eastern Ukraine regions he described as separatist states. Russia could retaliate by withholding the precious resource, affecting the global supply of an energy needed for a raft of everyday applications. Low supply means higher prices, spelling potential problems for factories that rely on gas and oil to power their operations.
Oil prices jumped 3 percent Thursday morning after Russian forces attacked Ukraine with explosions rocking the capital of Kyiv, multiple outlets reported. Natural gas prices rose 3.3 percent, while futures of Brent crude—the most-traded oil benchmark—climbed 2.75 percent to $99.50 a barrel. Prices are expected to continue surging in the days ahead as the conflict escalates.
European markets plummeted in the aftermath of Russia’s attack and stock indices sank into the red. Meanwhile, U.S. stock futures tumbled 800 points following the attack. Extended market volatility usually means consumers pause unnecessary spending as they watch their personal wealth contract.
“The effects of inflation and reduced purchasing power could spillover to economic activity and weigh on growth prospects of affected, particularly the European Union,” a Wells Fargo international economic outlook report said Wednesday.
This could play out as a Catch-22 for the U.S. A Russia-Ukraine war could benefit the “safe haven” status of the U.S. dollar, making imports cheaper for consumers while damaging exports and American production. A stronger dollar would also make the U.S. more costly for international travelers just when retailers are banking on a tourism comeback.
On top of everything, the Conference Board’s Consumer Confidence Index is now at 110.5, down from 111.1 in January, marking the second consecutive monthly decline. While the present situation component inched up to 145.1 in February from 144.5 last month, the expectations portion reflecting consumers’ short-term outlook slipped to 87.5 from 88.8.
“Expectations about short-term growth prospects weakened further, pointing to a likely moderation in growth over the first half of 2022. Meanwhile, the proportion of consumers planning to purchase homes, automobiles, major appliances, and vacations over the next six months all fell,” said Lynn Franco, senior director of economic indicators at The Conference Board.
Consumers also have changing opinions of the job market, with 53.8 percent describing jobs as “plentiful,” down from 55.0 percent last month. However, slightly fewer say jobs are “hard to get,” as 11.8 percent versus 12.0 percent last month. But looking ahead six months out, consumers were generally less optimistic, with 21.3 percent expecting more jobs to be available in the near term, down from 22.1 percent. And 17.9 percent anticipate fewer jobs, up from 16.6 percent.
Wells Fargo economists Tim Quinlan and Sara Costakis noted slight signs of easing in the labor market with fewer job postings versus a year ago, based on Indeed.com data and aligning with the consumer sentiment on shrinking employment opportunities.
“Although a tight labor market usually keeps consumers in high spirits, the highest inflation in 40 years may be too much of a problem to overlook as consumers’ confidence slipped in February to 110.5, its lowest since October,” they said. Consumer confidence fell in February to its lowest level in five months, they added. Meanwhile, inflation is rising as fast as it has since the early 1980s at up 7.0 percent.
Meanwhile, credit ratings firm Fitch Ratings said extremely high wage and input costs linked to pandemic-driven labor shortages and supply chain disruptions are putting U.S. corporate pricing power to the test.
“Producer input prices and wages are rising faster than consumer price inflation, based on data from the U.S. Bureau of Labor Statistics,” Fitch Ratings said. “This suggests margin risk could remain elevated over the near term, but margins generally remain healthy relative to pre-pandemic levels as companies have passed on some of their incremental cost to consumers.”
The ratings firm said that credit implications will vary across sectors and individual issuers.