Putin’s invasion of Ukraine might have just made record-high inflation even worse

The U.S. is currently in an inflationary environment—the cost of goods and services in January rose 7.5% year over year. “Now you’re pouring fuel onto an already well-kindled fire. And it’s easy for things to get out of hand in that environment,” Diane Swonk, chief economist at accounting firm Grant Thornton, tells Fortune. 

In response to Russia’s invasion of Ukraine, President Joe Biden levied severe sanctions against Russian banks and elites, and hindered the country’s ability to raise money and trade new debt. 

But while the sanctions are aimed at Russia, Americans will feel some of the blowback. “There is no Las Vegas in the global economy. What happens abroad comes right back on our shores,” Swonk says. 

That’s especially true in this situation because Russia is a huge oil and gas producer. 

“What happens in Russia could have a profound impact in terms of energy availability and price,”  Patrick De Haan, head of petroleum analysis for GasBuddy, said Thursday. 

Biden said Thursday that he was coordinating with other countries to secure global energy supplies, but experts predict the ongoing conflict will disrupt oil production and increase prices at the pump. 

Crude oil prices did briefly soar above $100 a barrel on Thursday—the first time since 2014. Currently, gas prices nationwide are averaging $3.54 a gallon, according to AAA. That’s on par with prices a week ago and up by $0.21 from a month ago. 

De Haan says that the increases in gas prices will likely play out over the course of the next several days as gas stations nationwide are filling up with fuel that’s now priced higher. The national average could rise five cents to 15 cents a gallon over the next one to two weeks, according to De Haan. Experts predict that national average prices could top $4 per gallon. 

If crude prices continue to rise, it could put upward pressure on overall inflation, Swonk says. That’s because there’s also the inevitable spillover effects from these higher oil and gas prices. The increased costs of transportation are likely to be passed on to the American consumer, Swonk notes, through rising airline fees and price increases tied to the higher cost of moving goods. De Haan says consumers may even see extra fees added to their Uber and Lyft rides in the coming weeks. 

But beyond gas prices, experts also worry about the conflict’s effect on commodity prices, since Russia and Ukraine are responsible for nearly 20% of the world’s wheat and corn production. Those futures already saw spikes Thursday morning. It could mean a “very, very rough time” in numerous critical areas—wheat, corn, vegetable oils, biofuels, and fertilizer, says Gro Intelligence CEO Sara Menker. 

“I know this is hard, and that Americans are already hurting. I will do everything in my power to limit the pain the American people are feeling at the gas pump—this is critical to me. But this aggression cannot go unanswered. If it did, the consequences for America would be much worse,” Biden said Thursday.  

‘This is the Fed’s worst nightmare’

Rising prices are problematic, but Swonk says the real issue is that the Ukraine conflict could transform it from transitory to long term. “What’s so insidious about that process is that once that gets embedded, it’s really hard to get rid of. You don’t want to let that take hold,” she says.  

“An extended war in Eastern Europe could lead to higher global energy prices and higher U.S. inflation, forcing the Federal Reserve to tighten monetary policy aggressively, and higher interest rates could become a larger headwind for the U.S. economy,” PNC chief economist Gus Faucher said in an email.

The Federal Reserve was expected to put several interest rate hikes into effect this year to cool consumer demand, but the central bank officials were also counting on oil prices continuing to slide, and supply-chain bottlenecks easing enough to send goods prices tumbling to also help alleviate the inflationary pressure. That’s unlikely to happen now. 

“This is the Fed’s worst nightmare,” Swonk says, adding that the central bank is walking a tightrope, especially given that now the U.S. faces an increased risk of “stagflation,” where prices continue to run hot even as the economy contracts and unemployment rises. “It really is a house of cards that you worry one wrong move could collapse the whole thing.” 

With the ongoing conflict, the Fed runs the real risk of raising interest rates too aggressively as global and U.S. economic growth is slowing, Faucher says. If the Fed raises rates too much, it could very well send the U.S. into a recession.

And despite the current market turmoil, Swonk says, the Fed has to move to raise rates. “They have to move to cool inflation,” she notes, predicting that while the Fed may opt to implement a smaller 25-basis-point hike instead of a 50-basis-point hike, she expects the central bank will raise rates 75 basis points by June.

“Just thinking that because there’s financial market turbulence, the Fed wouldn’t do something is ignoring the fact that this is a different context than any other financial crisis we’ve had in recent years. This is a financial crisis against the backdrop of already stoked inflation. The risk of it becoming much more of a longer term problem is greater than the risk of financial market turbulence,” Swonk says.