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Top economist Mark Zandi says forget Biden’s stimulus—Putin’s war in Ukraine is by far the biggest driver of inflation

June 13, 2022, 7:39 PM UTC

The war in Ukraine and the subsequent sanctions imposed on Russia account for more than a third of U.S. inflation, according to the chief economist at Moody’s Analytics, a financial services firm.   

Mark Zandi broke down the drivers behind May’s skyrocketing inflation numbers, which rose unexpectedly to a four-decade high of 8.6% last month, in a Twitter thread Sunday. Principal among them was the Russian invasion of Ukraine, which he said contributed a 3.5% year-over-year increase in consumer price inflation through May. 

“The Russian invasion and spike in oil and other commodity prices is the No. 1 reason, followed by the pandemic & the housing shortage,” Zandi wrote. He added that most of that growth, 2.8%, is from the invasion directly pushing prices for commodities higher. 

Zandi’s tweets cite the Bureau of Labor Statistics and Moody’s Analytics as sources but do not detail how he landed at the analysis numbers. He included a link to a podcast episode, in which Moody’s Ryan Sweet, a senior director, and Cristian deRitis, the deputy chief economist, joined Zandi a day earlier to elaborate on the reasoning behind the Twitter analysis. 

“The primary culprit was higher energy prices, particularly gasoline, and a lot of that can be traced back to Russia’s invasion of Ukraine that caused global oil prices to spike,” Sweet said on the podcast.

Zandi noted in his tweet thread that higher energy prices have in turn spread into other sectors of the economy. 

“It’s led to higher diesel prices, which causes food prices to be higher, and it’s also bleeding into things like airfares,” he said on the podcast. 

The COVID-19 pandemic, mainly through its disruption of supply chains, was responsible for 2% year-over-year growth in consumer price inflation, according to Zandi. 

Zandi added in his tweets that an unspecified “other” category—which he told Fortune denotes underlying inflation—contributed to 2.3% of the rise.

“At an estimated 2.3%, it is consistent with the Federal Reserve’s inflation target. It suggests that if not for the factors accounted for in the analysis, inflation would currently be near the Fed’s inflation target,” he said of the category. 

In his analysis, Zandi pushed back against other economists like Steven Rattner and Larry Summers, who have blamed the Biden administration’s $1.9 trillion American Rescue Plan, during which Americans received $1,400 stimulus checks, for contributing to inflation. In fact, Zandi believes that the American Rescue Plan represented only 0.1% year-over-year growth. 

“Often-touted reasons for the outsized inflation, such as stiff regulation of the fossil fuel industry, strong money supply growth, and corporate greed are not playing a significant role in the high inflation. Ditto with the American Rescue Plan,” Zandi wrote on Twitter. 

Zandi also claimed that energy regulation and the money supply had null effects on inflation.

The economist concluded by arguing that inflation should ease as the pandemic subsides and the market eventually adjusts to sanctions against Russia.

“If you buy into this analysis, it suggests that inflation will peak when the fallout of the Russian aggression on oil/commodities is behind us,” Zandi wrote. “No one else seems likely to sanction Russian oil, and the pandemic-related disruptions are fading. Inflation should thus moderate meaningfully by this next year.”

Still, he warns other contributors—such as the affordable housing crisis and its year-over-year price growth—will not get resolved so quickly, meaning that “inflation won’t be fully back in the box until mid-decade.” 

In an op-ed for CNN, Zandi wrote last week that his optimistic view that inflation will ease soon is contingent “on the Federal Reserve getting monetary policy roughly right.” 

“That means raising interest rates fast enough and high enough to slow down the strongly growing economy and contain inflation expectations, but not too fast and high to push us into recession. This will require some deft policymaking, but so far so good,” Zandi wrote. 

Other economists and academics—including Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget—were skeptical, pointing out that his timing of when the Russian invasion would have raised prices might be “off” since the war did not officially begin until February. 

“Global oil markets began to anticipate a Russian invasion of Ukraine in December 2021. Oil prices were close to $70 per barrel and falling when a Russian invasion began to become a significant possibility,” Zandi said of their comments. “Moreover, the analysis includes the impact on inflation of oil and range of other commodity prices, including prices for agricultural prices, metal, and gases, that are exported by Russia and Ukraine.”  

Kyle Pomerleau, a fellow for tax policy at the American Enterprise Institute, questioned Zandi’s lack of attention to demand-side factors of inflation. 

“A war can increase commodity prices, but shouldn’t that also make people worse off and translate into less price pressure elsewhere? Same Q for labor shortages,” he wrote on Twitter Monday. “Seems like there has to be something on the demand side going on!”

Jason Furman, former presidential economic adviser under Barack Obama, also asked if alternative explanations had been left out: “How do these factors explain rising shelter or wages?” 

In response to the inquiries, Zandi told Fortune: “The affordable housing crisis captures the impact of accelerating rent growth. Labor shortages capture the impact of accelerating wage growth, but it’s small, as for the most part wage growth is being driven by inflation and not vice versa. At least so far.”

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