gros161_Robert GauthierLos Angeles Times via Getty Images_gasprices Robert Gauthier/Los Angeles Times via Getty Images

Is Putin’s War Driving Up Commodity Prices?

If the Ukraine war was the main reason why commodity prices have reached their current heights, consumers should receive compensation and governments can justify higher fiscal deficits. But there is good reason to think the principal causes lie elsewhere – and that a very different policy response is in order.

FLORENCE – Sky-high commodity prices have the world reeling. Inflation has reached 7% in both the United States and in Europe – a level unseen for decades – with European consumers facing losses of purchasing power equivalent to those caused by the oil shocks of the 1970s. The economic recovery from the pandemic is now at risk of stalling, and the specter of stagflation looms over developed countries from the European Union to Japan.

One might assume that Russian President Vladimir Putin’s war in Ukraine is the primary cause of spiking energy and commodity prices. Russia is, after all, the world’s largest exporter of oil and petroleum products, and, together with Ukraine, it accounts for a third of global wheat and barley exports. But there are two compelling reasons to doubt this explanation.

First, the war has not led to large-scale interruptions in the supply of oil, gas, or other important commodities (at least not yet). Of course, the mere expectation in markets that a shortage is imminent can be enough to drive up prices. But such an expectation so far seems to have little basis.