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Putin Changed the Inflation Outlook Dramatically

Putin’s decision to go with a full-scale invasion of Ukraine has many dramatic consequences that go far beyond inflation and interest rates. But lets discuss inflation for 2022–2023, because the inflation outlook will drive monetary policy and interest rates going forward, so it should certainly be understood, because this has consequences for stocks, real estate, growth, and elections in 2024.




Here is the central bank interest rate 1975–2022. Recessions are the shaded areas:

ALL recessions are preceded by monetary tightening (increases of short term interest rates) by 12–24 months. In other words, once a “tightening cycle” ends, that is when rates stop increasing and start a “flat phase”, you get a recession 12–24 months after. Not all monetary tightenings cause recessions, as can be seen in 1994–1995, but MOST monetary tightenings end up with a recession.


Price pressure is considerable across the world and especially in the USA. There WERE hopes that the pressure would stop decreasing some time around June or July, because:

  1. There would be a gradual decrease of “base effects” (a drop of prices in 2020 and part of 2021 followed by a sharp increase due to return to normal).

  2. A gradual return to functional global supply chains would reduce production cost problems and supply problems.

  3. A reduction of the labour shortage for many reasons: increasing immigration, the end of federal income support programs, a drawdown of private savings, etc.

Putin’s war changes a lot of this, and price pressures could extend well into 2023 and 2024: global supply chains will remain severaly disrupted due to the global sanctions on Russia, energy prices could keep rising, which will feed into production costs and inflation, and strong wage increases now are putting upward pressure on production costs:



Producer Price Inflation 1982–2022:



Unit Labour Cost Inflation 1982–2022:



Wage Inflation 2001–2022 (no data before 2001) :



Global Energy Price Inflation 1992–2022:


As can be readily seen by the various graphs, there are considerable cost pressures mounting since 2021, and this “round” of cost pressure could feed rounds of consumer price pressures (CPI inflation) due to increasing production costs that need to be covered.

Enter Putin’s invasion of Ukraine. This invasion is going to cause a global energy supply squeeze, as well as a commodities squeeze, because both Russia AND Ukraine are major global suppliers of various commodities:


  1. Oil and gas (Russia).

  2. Grains, such as wheat, maize and others (Ukraine and Russia).

  3. Seeds (Ukraine).

  4. Metals and other commodities (Ukraine and Russia).


Russia and Ukraine will essentially be almost totally cut off from global markets for at least 2 years, and this WILL add to already-strained supply chains. This on the back of production cost pressures “inherited” from 2021–2022.


Central banks will have no choice, even if it will hurt, because this is all “supply shocks”, which in themselves cause a slowing of growth… and central banks will feel forced to add extra pressure on the brake peddle to contain more-persistent-than-anticipated inflation.


The monetary tightening will thus probably be more severe than it otherwise would have been, with constantly tightening monetary conditions in 2022 and 2023 (short term interest rates and central bank balance sheets). This paves the way to problems in 2023–2024 and a very big challenge for DEMs in the 2024 US Presidential Election, because it is essentially impossible to win an election for a sitting president (or party) if there is a recession in the election year.


I don’t want to get into geopolitics, first because it is not my area of expertise and second because we don’t really know what will happen, but lets just say that everything points to a long slog for invasion. Unless Putin gets ousted by a domestic revolution in Russia OR by being “eliminated” in some way. If he remains in power, then we all know the possibilities:


  1. Russia will “take over” Ukraine, but it will be hell to stabilize and keep due to strong (and understandable!) resistance from Ukranians, and the sanctions will bring enormous economic costs and political pressure on Russian leadership, but they are unlikely to back down.

  2. Russia will attack some other country, maybe even a member of NATO (Poland, Lithuania, etc.) and this will only add to existing pressure and potentially get very ugly.

  3. Ukraine will give East Ukraine to Putin to de-escalate and get out of the hell of the constant bombarding of cities, infrastructure, and villages, and people.


To me the most probable outcome is number one, but it really doesn’t matter for inflation, interest rates and the economic and financial outlook for 2023: there will be more inflation than previously anticipated and hence more brutal monetary policy, hence higher economic and financial risk until inflation abates and Putin is out of the picture, in one way or the other.


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Pascal Bedard

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