Because of all of this, it is quite possible that oil prices will spike in the short run but then fade in the months ahead. However, for the overall inflation outlook, a further period of high headline inflation could lead to faster wage growth and higher inflation expectations converting some transitory inflation forces into something stickier.
For U.S. economic growth, the impact of an energy shock would be unhelpful. However, it probably wouldn’t trigger a recession for three reasons:
First, entering the spring of 2022, the effects of a two-year pandemic are finally fading. This is unleashing huge pent-up demand for travel, entertainment and leisure services and greater spending in this areas in the months ahead could offset cutbacks elsewhere caused by higher gasoline prices.
Second, the economy is currently experiencing record excess demand for labor. Last Friday’s February jobs report showed strong momentum across the board. Based on these numbers, we believe February wage and salary income rose by 0.8% month-over-month and 11.5% year-over-year. Moreover, we expect Wednesday’s JOLTS report to show roughly 10.8 million job openings, implying a record 4.5 million gap between the number of job openings and the number of unemployed workers. Ukraine will undoubtedly hurt business confidence. However, starting from such an excess demand for workers, U.S. labor markets are likely to remain tight throughout the year.
A third reason for hope lies in policy. Congress and the Administration are acutely aware of the economic hardship inflicted on lower income consumers from higher food and energy prices. This increases the possibility of some further fiscal spending in a reconciliation bill and reduces the risk of higher taxes.
In addition, monetary tightening should be less severe and more predictable. When Fed Chairman, Jerome Powell was testifying to Congress last week, he explicitly stated that he was inclined to propose and support a 25 basis point hike in the federal funds rate at the March FOMC meeting, effectively taking a 50 basis point hike off the table. He also noted his desire to avoid adding uncertainty to an extraordinarily challenging and uncertain moment.
The bottom line for investors is that Ukraine has added to global inflation, reduced prospects for global economic growth and greatly increased uncertainty in the short-run. However, the pressure on the U.S. economy so far does not look sufficient to push America into recession. While there is every reason to be cautious and very well diversified in the short run, long-term investors should still be thinking about how to position portfolios for the long run when both the pandemic and, hopefully, the impacts of Putin’s invasion of Ukraine are in the rear-view mirror.
David Kelly is chief global strategist at JPMorgan Funds.