Shock and war: global prices rise

Hello and welcome to The Intelligence from The Economist. From London, I'm Jason Palmer.

And in New York, I'm Jon Fassman. Every weekday, we provide a fresh perspective on the events shaping your world.

In the fourth instalment of our French election series, we look at the impact of the war in Ukraine, both for President Emmanuel Macron, busy with diplomatic efforts to end the conflict, and for challengers who seem increasingly out of tune with the moment.

And to what extent does color signify health in birds? How can people best grow crops in space? For the past 30 years, scientists have used the area around Chernobyl to answer these and many other questions. Now the war in Ukraine threatens that research. But first—

At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability.

To nobody's surprise, America's central bank raised interest rates yesterday for the first time in 4 years.

In support of these goals, the FOMC raised its policy interest rate by 1/4 percentage point.

More surprising was the news that they'll probably do it again 6 times this year. The Federal Reserve Chair Jerome Powell explained that the hikes are in response to a booming economy, which is leading to inflation.

The economy is very strong, tremendous momentum in the labor market. We expect growth to continue. It's clearly time to raise interest rates and begin the balance sheet shrinkage.

Last week, America's Bureau of Labor Statistics reported that prices rose by 7.9% in February compared to a year ago. That's a 40-year high. Many expected they would begin falling as COVID-induced supply chain snarls eased. But the war in Ukraine dashed those hopes.

The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine will put additional upward pressure on near-term inflation here at home.

That problem is not just being felt in America. Today, the Bank of England is expected to raise its key interest rate. This shifting picture has left central bankers in a tough spot.

It's a hard time to be a central banker.

Simon Rabinovich is The Economist's American economics editor.

Last year, they were dealing with the pandemic and the incredible supply chain snarls leading to highest inflation in 4 decades. And now they have to think through the consequences of war, which in some cases will be inflationary, but potentially also recessionary.

And so walk us through that if you can. What are the economic consequences of Russia's war for Western powers?

Well, to put it very crudely, the war increases the risks of stagflation, by which I'm referring to the idea of growth getting much slower at the same time as already high inflation gets even higher. The primary mechanism by which this is happening has been the shock to global commodity markets, especially oil market, where oil prices shot up quite dramatically. Of course, they've now fallen back in the past week or so. But if you're looking at the impact of incredibly elevated global commodity prices, whether for oil, for nickel, or for wheat, is that it'll push up the cost of production, push up the cost of living for people, which of course feeds into higher inflation. But at the same time, it presents a pretty stiff headwind to growth. Nobody's forecasting stagflation this year. Economic growth still looks fairly robust, but you can even see the most recent projections from the Federal Reserve, they've lowered their forecast for growth this year from about 4% to 2.8%. Throughout the world, central banks and governments are looking at higher inflation and lower growth than they would have liked to have seen.

And what does that mean for central bankers? I was watching the Fed press conference along with you, and Chairman Powell seemed optimistic that they would get inflation under control without hurting growth.

Oh, he's definitely being optimistic. The history is that one when there's been this scale of oil price shock, and two, when the Federal Reserve begins a tightening cycle, the odds of there being a recession, not immediately, but say 12 to 24 months down the line, far higher. Is he being too optimistic? Well, I mean, as he laid out, and I think it's definitely fair to say, the economy is incredibly robust right now. There's still a lot of pent-up demand coming out of the pandemic, people who've not who have not taken trips for years who want to do that kind of thing. You have a labor market right now which is incredibly tight. There's, you know, in America, 1.7 job openings for every single job seeker. So that implies that companies right now are incredibly eager to hire people. So there is, you know, a Goldilocks scenario where they raise rates sufficiently to bring inflation down and they don't derail growth in the meantime. Nevertheless, there is, there is a chance that they get it all wrong.

But how likely is it that they'll get it wrong? I mean, it feels like this isn't as unique a situation as, say, the pandemic, right? People who know central banking history know about the 1970s, about oil price shocks and how central banks raised rates to get inflation under control. This situation in some ways seems like one that bankers like Mr. Powell have a playbook for.

Well, I think it's edging towards more familiar territory, but it's still clearly a really extreme environment for the economy right now. Clearly, there's a strong impetus now for central banks to tighten monetary policy, feeling that they're quite far behind the curve. You had obviously the Federal Reserve raising rates today and then committing basically to raise rates at every subsequent meeting this year. So that's going to be another 6 interest rate increases over the remainder of this year. Even the European Central Bank, where the economic concerns are more serious than in America, we heard recently from Christine Lagarde, the president of the ECB, you know, has come out and indicated that tapering from their big easing during the pandemic, the removal of their bond purchase program is going to be more aggressive than many in the market had expected.

The Russia-Ukraine war will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce, and weaker confidence.

But this is just focusing on the war's impact on oil prices and commodities. What about sanctions?

Right. At the Fed press conference yesterday, I asked Chairman Jerome Powell about the implications of the sanctions and whether or not they might impact the dollar's status as the global reserve currency. Thank you, Chair Powell. Sorry to take you away from inflation for one minute. May I ask about the sanctions on Russia? And specifically the freezing of the central bank accounts? And Mr. Powell made clear that this was not something that was in his authority.

Well, so of course, central bankers around the world are generally very, very in favor of these sanctions. But let me say this, sanctions are really the business of the elected government. And that's true everywhere. So I'm reluctant to comment on sanctions really much because again, they're not for us.

Politically, it was clearly the right answer for Mr. Powell, but obviously he's being a little bit cagey. I mean, we're in unprecedented times for the global financial system. The US dollar has long been seen as the safest asset to go to in times of crisis. And very clearly now, for a range of countries and central banks around the world, although they might still see the dollar and the Treasury market as the most liquid in the world, they have to recognize the risk that because of geopolitics, they may be barred from that liquidity. They may not be allowed into that pool.

Let me end by taking a step back a bit. Simon, you're covering America's economy for us, and before that, you know, you covered China's. You have a sort of unusually global view of things. Let's set rate hikes aside for a minute. What worries you most about the world's economy right now? What is the thing that keeps you up at night?

Well, the direct answer is that is my 2-year-old keeps me up at night. But, um, her aside, there is a, you know, a rising risk, as we can see through elevated inflation that central banks get it wrong. And I think the risk there is not just that they then have to tighten aggressively, but if they continue to get it wrong, if inflation continues to surprise by quite a lot on the upside, then they're going to have to adjust quite aggressively. Doing so is very painful for the economy. And I think even more alarming than that would be the political implications. You know, already institutions like the Federal Reserve have been increasingly politicized. I think if we do get into a scenario where inflation remains too hot, you then have to have aggressive tightening, which then potentially leads to quite a high risk of recession. It's not just the economic downside, but it's the political downside that really worries me.

That is worrying, and no doubt we'll keep checking back in with you. But for today, Simon, thanks so much for your time.

Thank you, John.

[No speech]One commodity in particular has been impacted by Russia's invasion of Ukraine: wheat. The two countries combined are responsible for nearly a third of the global supply. Our sister podcast, Money Talks, looks at what this disruption could mean for everything from corn to coffee. Find it wherever fine podcasts are grown and harvested.

France's President Emmanuel Macron has been relentlessly seeking a diplomatic solution with Russia before and since the country invaded Ukraine. He's called or met with Vladimir Putin, Russia's president, at least 16 times since last December.

I have to say, we're constantly engaged. I was in discussion with President Putin till the very last minute before he launched his war and after he decided to launch this war, to try to reopen negotiations and get a ceasefire.

Meeting with Ukrainian refugees at a welcome center this week, he's also announced plans to welcome at least 100,000 of their number. And he's not ruling out a visit to the Ukrainian capital, Kyiv. But only if there is what he calls a tangible result.

I don't exclude anything, and no political initiative.

I would do it when I consider that there could be a useful result.

Amidst all of this, you could be forgiven for forgetting that Mr. Macron is also in the middle of a reelection campaign. In this fourth installment of our French election series, we look at how the return of war to Europe is influencing voters ahead of the April poll.

This presidential race is turning out to be one of the strangest election campaigns in modern times, certainly the strangest that I've ever covered.

Sophie Petter is our Paris bureau chief.

Emmanuel Macron, who's the sitting president, waited until March 3rd, that was a day before the deadline, before he announced formally and finally that he's running for reelection in a letter that he published to the French public. A few days later, I then went to his first campaign event in Poissy, which is a town in the Yvelines to the west of Paris. And Macron told the crowd that he is running for re-election, but in a very unusual, unique geopolitical context. [SPEAKING FRENCH] It seemed like he was saying this almost as a way to manage people's expectations of him on the campaign trail and how much time he was going to be able to devote to it. Because as he kept saying, I'm also president and there is a war on.

And how did that land among the people who were at that launch? What were they saying?

Talking to people at the event, some of them highlighted his ability to manage crises very well, and that's something that he tends to be quite good at. One young man told me that he trusted Emmanuel Macron to open France again because of his track record so far. But other people at that event were not quite that supportive. There was one woman I spoke to who suggested that Macron was using the war as an excuse to look like some kind of savior. It was, in her view, a means of deflecting criticism of his own presidency.

Well, what do you make of that argument that it is a bit of wartime president electioneering?

Well, I think it's inevitable that Macron is going to be open to that criticism because he is trying to use diplomacy and other means to bring an end to the war in Ukraine at the same time as he's campaigning for the presidency. The two are happening at the same time, and that exposes him to the criticism. But I think, you know, you are actually also looking at someone who, as a politician, is at his best in a crisis, and that is what the French are seeing. There are a lot of factors right now that are playing in his favor. The French, I think, are feeling extremely anxious, like many in Europe at the moment, and so the sort of search for stability could play in his favor. It's also meaning that because he's spending so much time on the phone to Putin or trying to talk to other Europeans and other Western allies about ending this war, that he's not spending so much time on the campaign trail. And a lot of the candidates are finding that very frustrating. He said, for example, he won't participate in any debate until the second round.

Until the second round of the election, the April 24th runoff, suggesting he's very confident that on April 10th he's going to sail through the first round.

Well, I mean, he's trying to tell his own campaign team not to sound triumphalist, and he's insisted publicly that everything is still open, everything's still to play for, and that it's a mistake ever to assume that things are won until they are. But if you look at The Economist's electoral forecasting model, we now put at 97% Macron's chances of reelection, which is really astonishingly high. So I don't think there is much doubt that he will make it to the second round. The other candidates are not looking as strong at the moment.

How do you mean? How are those other candidates looking?

I think the war has had an impact on all the candidates, not just those on the extreme. There has been a sort of rally around the flag effect. Nearly 80% of the French support welcoming refugees. They're supporting the export of arms to Ukraine. And it means that it's quite a difficult time for a Eurosceptic candidate or for an anti-immigration candidate, which both Marine Le Pen and Éric Zemmour are to make that case. I think also that Vladimir Putin's aggression has exposed the contradictions of a number of Macron's opponents, in particular those on both the far left and the far right. If you think about Marine Le Pen, she took a campaign loan from a Russian bank back in 2014, and in one of her campaign brochures, she advertised a photograph of her meeting Putin in the Kremlin, which has become an embarrassment So even if Marine Le Pen and Éric Zemmour have made an effort to say that they condemn the war, their past praise for either Russia or Putin has come back to really embarrass them. That goes for Éric Zemmour as well, because he, up to a point, has been the most praiseworthy of Putin and at one point said Putin was a true Russian patriot.

Seul Poutine reconnaît qu'il regrette le temps de la grandeur de l'Union soviétique. Tous les patriotes russes regrettent le temps où leur pays était une des deux puissances mondiales comme—

And at another time he said that he dreamed of there being a French Putin.

Vous rêvez d'un Poutine français? Ah oui, j'en rêverais.

And on the far left, Jean-Luc Mélenchon too has been caught out by the fact that he has found it very difficult to condemn much of Russia's aggression over the past few years.

Well, in that sense, it seems like things are kind of going Mr Macron's way.

And Macron knows he can't be complacent, that he does still suffer from this image of being a remote president. It's an image that he cultivated himself when he took office, of course. And even if 59% told a poll that they think he's risen to the challenge over Ukraine, only a third say that he is close to people's concerns. And those on the left still judge him to be the president who helped the rich because of the early tax cuts that he made. So There are still criticisms of the sitting president in France, and you continue to hear them. But the opposition is so fragmented, has proved to be so weak, that I think even with this popularity problem, it is increasingly hard now to see how Mr. Macron won't, next month, in the end, keep his job.

Sophie, thanks again for joining us.

Thanks, Jason. It's always a pleasure.

We'll turn our attention back to France in 2 weeks' time for the 5th episode in our series. You can find all of our French election coverage online at economist.com/france2022.

Since Chernobyl's nuclear reactor core melted down in 1986, The surrounding area has been deserted by people, but it has teemed with wildlife. For the past 3 decades, scientists have been able to observe the real-time effects of radiation on plants and animals. But the war in Ukraine and the seizure of the Chernobyl power plant by Russian soldiers now imperils that research.

So Chernobyl creates an unusual circumstance where you have normal natural forest with relatively healthy conditions right next to normal natural forest that is effectively identical but highly radioactive.

Matt Kaplan is a science correspondent for The Economist.

So you can look at how animals interact in this radioactive environment compared to a relatively healthy environment that is otherwise identical to it. And it creates a natural laboratory for studying those two things.

And so what sort of wildlife-related research projects have we seen coming out of that natural laboratory?

During a visit to the Chernobyl site in 2000, a researcher named Dr. Timothy Musso from the University of South Carolina looked at what was going on and had this realization that he could use this forest to study evolution in real time. The, the work that really started off Dr. Musso's research was looking at barn swallows, which lived in the area, and they weren't able to use Geiger counters and work out which bits of forest were radioactive and which weren't. So the populations lived in both sections of forest, and Dr. Musso was curious: are the ones that are living in the radioactive areas changing at all? How are their populations responding to all this radioactivity? Because we know radioactivity drives increased mutation rates. And so he looked at the genes of these birds, and he looked at the shapes of these birds over time, and found that in a relatively short window of time, the barn swallows living in the high radiation areas experienced much more variation in their physical form than those living in the low radiation areas, indicating that mutations were taking place as a result of the radiation exposure that were actually causing them to evolve rather quickly.

And what's the status of Dr. Musso's research projects now?

There are a lot of casualties of ongoing research in the area. Among them are a 6-year camera trap experiment that was documenting mammal distribution around the forest in abundance throughout radioactive areas. A really interesting study was monitoring the dogs that were left behind by people who abandoned the Chernobyl area when the meltdown occurred decades ago. The descendants of those dogs, of course, bred, and some of them live in the hot zones, some of them live further out, and the researchers were really curious about how their microbiomes— so the bacteria in their guts— have evolved in the different regions upon exposure to different levels of radiation. And that now has sadly been put on hold. Another really interesting experiment that was being conducted in collaboration with NASA was looking at the plants that grow in the various regions of Chernobyl. Now, plant exposure to radiation might not sound like a terribly important thing, but the reality is, if you want to grow crops in space and live off of them, You need to understand whether or not radiation is going to harm the nutrients that you get out of those crops. And so the work that Dr. Massot and NASA were doing has now been shut down in that area, and it won't be able to proceed until the war is over.

Even if they were able to get back in after the war, will they find the same wildlife there, or has the fighting affected where wildlife lives?

Yeah, that's a really good question, John. The cruel reality is that warfare is very noisy, and the researchers know from studying Fukushima which was no war zone but involved very noisy cleanup processes afterwards, that all of that noise drives wildlife away. Certainly tanks firing and mortars being launched and shells exploding are going to drive most wildlife that was living there to flee, just as the people did. So that's really sad news. On the bright side, we know from experience that once the war is over, wildlife will slowly return. How quickly it comes back is an open question. We just don't know. But frankly, that's a relatively minor issue compared to the more serious issue of what the Russians might have done while migrating through the Chernobyl area.

And what might they have done?

Well, a common tactic in warfare when you really don't want the enemy coming in and counterattacking you is to lay mines. And if the Russians did lay mines as they were moving through the forests of Chernobyl, they will make it— not just that wildlife will be blown up when it comes back, although I don't know how sensitive the mines are— they will make it utterly impossible for the researchers to get back in there. Because not only would they now be tangling with the threat of Chernobyl radiation, which is always an issue, but now they'll be threatened by the fact that the very land itself could explode underneath their feet. And that's really sad news indeed.

It is sad news. But thanks so much for joining us, Matt.

My pleasure, John.

That's all for this episode of The Intelligence. Let us know what you think of the show. You can get in touch at podcasts@economist.com.

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