Russia's attack on Ukraine will lead to a bigger impact on US economy as it pushes gas prices, inflation higher, dents confidence

Russia’s attack on Ukraine Wednesday means the conflict will take a bigger toll than believed on the U.S. economy as it drives oil prices and inflation higher and intensifies supply chain snarls.

“This moves us toward a less favorable economic outlook with slower activity and higher inflation,” says Gregory Daco, chief economist at EY-Parthenon.

Like other economists, Daco had based his forecast on the most likely scenario of a Russian troop deployment that fell short of military action. That would have led to a modest two-tenths of a percentage point reduction in U.S. growth this year to a still healthy 3.8%.

Under the worst-case scenario of a full-scale war, Daco predicted a hit to growth of up to a percentage point. He says he’s moving toward the more dire outlook but for now is predicting a middle-ground impact of about 0.6 percentage points.

Oxford Economic says it has shifted its base forecast for global economic growth to its scenario of a full-scale invasion.

“We’re looking at the tensions via the prism of an economy that’s recovering from COVID, global supply chains are really stressed, and we have a high inflation environment,” Daco said. “The tensions will further fuel inflation and further stress supply chains.”

Keep in mind the U.S. isn’t nearly as vulnerable to the conflict as Europe, which gets about 30% of its oil from Russia, compared with about 3% for the U.S., says Tom Kloza, chief global analyst for the Oil Price Information Service.

But a war could significantly curtail economic output as it hammers consumer and business confidence.

The U.S. economy grew 5.7% last year, the fastest pace since 1984, as reopening businesses, strong job growth, rising wages and government stimulus money sparked robust consumer spending and business investment. But low-income households have largely depleted their savings and the initial burst of outlays is largely played out.

In January, despite the spread of coronavirus's highly contagious omicron variant, employers added a booming 467,000 jobs and retail sales surged 3.8%. That led some economists to revise up their first-quarter growth forecasts from below 2% to 2% to 3%.

Here’s how the Russian invasion could crimp this year’s gains:

Energy prices

Russia is the world’s second-largest oil producer behind the U.S., churning out about 10 million barrels a day, Kloza says. The U.S. benchmark oil price was up as much as $8 to about $100 a barrel in mid-day trading Thursday in response to the fighting before closing up just $1.10, or 1%, at $93.20.

So far this year, the standoff has added $10 to $20 to the crude price on fears of a growing crisis that disrupts supplies, Kloza says. Prices, he says, also have been pushed up by increasing global demand and less production from the U.S. and Saudi Arabia.

The conflict could disrupt Russian oil supplies through sanctions that President Joe Biden slaps on Russia or Russian retaliation to U.S. sanctions, say Daco and economist Rubeela Farooqi of High Frequency Economics. Kloza believes both possibilities are unlikely because Russia doesn’t want to lose oil revenue and Biden doesn’t want to burden American consumers with even higher gasoline prices.

Under that scenario, Kloza reckons crude would top $100 and average unleaded gasoline will rise from $3.53 a gallon to just over $4 in coming weeks before drifting down to about $3.30 the second half of the year. Higher pump prices lead Americans to rein in spending.

If oil does become ensnarled in the sanctions, crude could climb as high as $125 to $150 a barrel while pump prices could reach $4.50, Kloza says.

Goldman Sachs is less sanguine. Even if sanctions don't disrupt oil flows, the research firm believes oil could approach $125 a barrel -- pushing unleaded gas closer to $4.50 -- because of the risk that "Russian commodities eventually fall under Western sanctions."

A possible silver lining is that U.S. talks with Iran about reviving their nuclear deal could free up an additional 1 million barrels a day for the global market, offsetting much of the damage caused by Russia’s invasion, Kloza says. Iran also has much is 85 million barrels in storage containers, Farooqi says.

“While there is no guarantee a deal can be reached, the release of Arends inventory would certainly help limit the impact on oil prices have a potential interruption of supply from Russia,” Farooqi wrote in a note to clients.

The U.S., Saudi Arabia and United Arab Emirates also could boost their production, Kloza says.

Supply chain problems

The standoff is also pushing up prices of other commodities such as wheat and aluminum that are exported from the region, Daco says. A war could further drive those costs higher as it hampers the shipment of such goods.

Inflation

Higher oil and commodity prices likely would stoke inflation that hit a 40-year high of 7.5% in January. The effects could add as much as a percentage point to consumer price increases, Daco says.

That, he says, could prompt the Federal Reserve – which is expected to raise its key interest at least three times this year – to hike more sharply, raising borrowing costs for households and businesses.

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Markets

Higher energy and commodity prices can hurt the earnings of U.S. corporations while Fed rate increases drive investment dollars from stocks to bonds. Both are bad news for markets and the S&P 500 index is already down about 7.4% this month, including 1% on Thursday, on jitters over the conflict.

Consumer and business confidence

Falling stocks and fears of rising prices and interest rates can easily ripple to the broader economy, Daco says. Businesses may pull back investment and hiring, damping job growth. Consumers, in turn, may rein in spending.

A possible bright spot is that falling stocks and other problems may prompt the Fed to raise rates more gradually.

“They don’t want to move in a way that will crush the recovery,” Farooqi says.

But Daco says that may be less likely in this case because the crisis could worsen inflation, which the Fed is intent on squashing.

More Russia-Ukraine coverage:

Protecting your money:Here's how to manage your stocks during the crisis.

Gas prices:Will pump prices keep rising after Russia's invasion of Ukraine?

How natural gas could become a pawn:Russia could retaliate against Europe by halting natural gas exports, if Europe doesn't do it first

This article originally appeared on USA TODAY: Russia Ukraine invasion likely to have bigger impact on US economy