US Federal Reserve chairman Jerome Powell. Photo: AFP / Al Drago

Because of the rise in commodity prices, bottlenecks in global supply chains, and the shift in the geopolitical landscape, inflation continues to surge all over the world. According to the data for March, the Consumer Price Index (CPI) in the eurozone soared to 7.5%. Inflation in the US inflation climbed to 6.4% in the 12 months ended in February, from 6.2% in the prior month.

There is no doubt that in the following months the situation will only get worse – unless, of course, something extraordinary happens. 

Additional pressure could arise from the Russian government’s decision to convert payments for gas supplied abroad into rubles. As of now, President Vladimir Putin has said the money would be paid to Gazprom Bank, which is not subject to sanctions and then transferred into the national currency. Eventually, however, Russia might try to switch the payment method to rubles for other raw materials as well.

The main problem is that there are not many alternatives to Russian supplies. The United States’ plan to deliver at least 15 billion cubic meters (bcm) more liquefied natural gas (LNG) to Europe could initially help but in the long term, it will not be enough to break the dependence on Russian gas. The question then becomes, will Europe close its eyes on the “green agenda” and resort to reactivating old decommissioned coal plants?

As for “black gold,” Saudi Arabia has warned that it would not take any responsibility for oil supply shortages on world markets caused by attacks by Houthi rebels in Yemen. The rest of the OPEC+ members have very little spare production capacity left.

The US strategic reserve as of March 25, according to the Energy Information Administration, stood at 568.23 million barrels of oil, the lowest level since 2002. With 180 million barrels withdrawn in the upcoming intervention, the strategic reserve could fall to its lowest level since 1983, with the US now consuming a third more oil than it did back then. 

Finally, the beginning of quantitative tightening (QT) could also play an important role in market sentiment. A couple of weeks ago chairman Jerome Powell announced that the US Federal Reserve was willing to raise its key interest rate by 50 basis points at a time instead of the traditional 25 basis points if necessary.

Philadelphia Fed chairman and Federal Open Market Committee (FOMC) member Patrick Harker, on the other hand, said that while he favors a “methodical” series of interest-rate hikes, he is willing to support more aggressive moves if necessary.

A further acceleration in inflation could be a suitable trigger. Concerns about slowing economic growth could fuel demand for protective assets, including the dollar, gold, and oil.

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.