The Precarious Election: Biden And Inflation, Part Two: The War in Ukraine Drives Inflation

In my Part One on why President Biden is not to blame for inflation in the United States, I looked at how the COVID-19 pandemic turned the economy upside down in 2020 and 2021.

In that piece, I noted that it was inevitable that Americans liberating themselves from the 2020 stay-at-home economy and hitting the road would confront the worldwide price increases in oil that the Biden administration, like all American governments, did not control. Computer chip shortages were limiting the production of new cars and driving price increases in both new and used cars. And an accumulation of cash in Americans’ pockets from the booming stock market, stock buybacks, mortgage refinancings, and savings from lack of expenses for travel, leisure, and remote work was providing just as much money as the Biden Rescue Plan in enabling spending in the economy.

But in 2022, the war in Ukraine became a principal factor in inflation.

THE ECONOMY IN 2022                             

In 2022, the United States economy grew 1.9%, added 4.7 million jobs ( after gaining 7 million in 2021), and unemployment was 3.5% in December 2022. Inflation was 6.5% for the whole year. Russia invaded Ukraine in February 2022. In January 2022 the price of regular gasoline in the U.S. was $ 3.31/gallon. In March 2022 the price was $ 4.22, and in June was $4.92/gallon. Year- over- year gas prices ended up fairly level,, but averaged $3.90 over the course of the year, up from an average of about $3.00/gallon in 2021, about a 30% increase.  Prices for natural gas, fuel oil, and electricity, which together impact Americans on a par with gasoline, rose 14% in 2022.

American domestic oil production rose nearly 8%, from 11.26 million barrels/day to 12.14 million barrels/day, to offset the halt of Russian oil imports to the US, and President Biden released oil from the Strategic Petroleum Reserve to moderate price increases in the United States. Nonetheless, the average rise in the price of retail gasoline and other forms of energy like fuel oil and natural gas contributed about 1.8 percentage points of the 6.5 percentage point increase in inflation.

US food prices were also affected by the invasion of Ukraine.

Food prices rose in the United States about 10% in 2022. Following the invasion of Ukraine, prices for agricultural commodities like wheat, corn, and soybeans spiked. The Bloomberg 2022 commodity index rose from 100 in January 2022 to 130-135 in the winter and spring months ( the invasion took place in late February 2022), calmed  by June 2022, but remaining elevated at 110 to 115 through the year, and overall world food commodity prices rose 14% over 2022.  Prices for cereals and grains flow through to the price of meat because feeding animals is a major cost of growing meat. The price of oil affects fertilizer and transportation costs in agriculture as well.

The avian flu epidemic necessitated the slaughter of significant numbers of poultry and doubled the price of eggs between 2021 and 2022, driving up poultry prices too.

I would not suggest either the invasion of Ukraine, or the avian flu epidemic, standing alone, were the dominant factors in food price inflation, but they were factors. COVID-based lockdowns in China disrupted supply chains in 2022, as did Hurricane Ian’s destructive power in Florida.

My previous article on inflation cited an analysis by the Wall Street Journal that excess corporate profits above 2019 levels were contributing one percentage point to inflation in 2021 and 2022.

Once again, war, disease, excess corporate profits, and supply chain disruptions are drivers of inflation in 2022, not President Biden.

2023 AND 2024: THE ECONOMY KEEPS GROWING AND INFLATION CALMS DOWN

In 2023 the American economy grew by 2.5%. The economy created almost 2.8 million jobs, unemployment was 3.7% in December 2023, and inflation was 3.4% for the year. Food price inflation dropped to 2.7% and gas prices dropped 1.9% year over year. US oil production reached all time highs in the United States, averaging 12.9 million barrels a day in 2023.

Remarkably, no recession occurred.

The driving force in inflation in 2023 is the cost of shelter, which rises 6.2%. Wealth creation continues as the S & P 500 rebounds 24% in 2023 after a drop of 17% in 2022, even as excess pandemic savings dwindle. The economy and inflation have stabilized and settled into a post-COVID recovery. 

In the early months of 2024, job growth remained healthy but inflation persisted at about 3.5% year- over- year in March 2024. Rises in the cost of shelter and oil were about half of the most recent inflation. Crude oil prices rose from about $75/barrel in January to $80 in February and $85/barrel in March. International tensions and unexpected rises in demand explain recent price rises despite record US oil production,  according to experts.

President Biden was not mentioned as the culprit in recent oil price rises.  As I wrote in Part One, three words should dominate a discussion of inflation since the beginning of 2021: COVID, OIL, AND WAR.