Inflation, rate hikes, energy prices drove economy in 2022

By Daniel Graeber
Economic leaders worldwide sought to hike interest rates throughout 2022 to combat rising inflation and fend off recession fears amid an energy crisis fueled by Russia's invasion of Ukraine. File Photo by John Angelillo/UPI
1 of 5 | Economic leaders worldwide sought to hike interest rates throughout 2022 to combat rising inflation and fend off recession fears amid an energy crisis fueled by Russia's invasion of Ukraine. File Photo by John Angelillo/UPI | License Photo

Dec. 14 (UPI) -- Inflationary strains in 2022, compounded by one of the worst energy crises since the Arab oil embargo in the 1970s, may be easing, though prevailing sentiment suggests the global economy is not out of the woods.

The year started with a bit of optimism as vaccines targeting the novel coronavirus that causes COVID-19 marked the end of social restrictions and the return to some semblance of normalcy. Contacts across the U.S. Federal Reserve Districts expressed optimism heading into 2022, though supply-chain disruptions that came as a result of resurgent demand were creating headwinds.


For the 12-month period ending in January 2022, consumer-level inflation was 7.5%, which at the time was the sharpest year-on-year increase since the 12-month period ending February 1982. By November, it had slumped to 7.1% but the road to get there would prove to be difficult.


The global economy, along with the prevailing sense of global order, was upended further when Russian military forces invaded Ukraine in late February. In a telling statement a few short days after the invasion, Kristalina Georgieva, managing director of the International Monetary Fund, and David Malpass, president of the World Bank, said the war had quickly created tough global economic conditions.

"Commodity prices are being driven higher and risk further fueling inflation, which hits the poor the hardest," they said in a March 1 statement.

An early March research note from Swiss investment firm UBS was decidedly bullish as Western economies worked to sideline imports of Russian natural gas, crude oil and refined petroleum products as part of a coordinated effort to diminish the Kremlin's war chest.

Sanctions targeting Russian products had yet to materialize -- by December, the European Union would stop importing waterborne crude oil altogether and have a price cap in place -- though would-be customers were shunning its fossil fuels out of fear of getting ensnared in sanctions. That disruption prompted UBS to revise its June forecast for the price of Brent crude oil, the global benchmark, from $95 per barrel to $125 per barrel.


Phil Flynn, a commodities analyst at The PRICE Futures Group in Chicago, said he doesn't have much faith in European efforts to artificially limit Russian deliveries by way of price caps.

"It means less supply," he said amid growing concerns that crude oil prices will return to the $100 level sooner than later.

Brent hit $123.58 per barrel on June 8, a stark contrast to $9 per barrel during the worst of the pandemic and the highest since April 2012. Retail gasoline prices hit $5.01 roughly a week later, sending a jolt across the U.S. economy.

"To the companies running gas stations and setting those prices at the pump, this is a time of war," U.S. President Joe Biden said in June. "These are not normal times."

Patrick DeHaan, senior petroleum analyst at pump-watcher GasBuddy, said gasoline was a major concern across all segments of the U.S. population as pent-up demand from the pandemic was met with elevated prices for much of the year

"While many choose to point fingers at one political party or the next, the reality is that the global economy is highly unstable, and the White House has limited tools to alleviate the pressure," he said.


For the European economies, however, it was the price of natural gas that was a major concern.

By the end of the year, European gas storage levels were reasonably secure and vessels laden with liquified natural gas -- sourced largely from the United States -- were queued up offshore, but European leaders during the summer were fearful of severe shortages.

The European economy relied on Russia for about 40% of its natural gas supplies before the war. European Commission President Ursula von der Leyen expressed alarm in late July that the Nord Stream gas network -- a target of sabotage in October -- would be disrupted, depleting gas storage levels even further.

Russia had closed sections of the pipeline, ostensibly for maintenance, during the summer, prompting European leaders to consider rationing natural gas. The EU, von der Leyen said, would do "whatever it takes" to ensure energy security on the European continent.

The energy crisis meant that inflation for the economies that use the euro currency flirted with 10% for the 12-month period ending in July, strained in no small part by shocks in the commodity markets. Central bank policy makers on both sides of the Atlantic were raising lending rates, but the 50 basis point increases at the time would seem tame in comparison to later-year efforts to dampen inflation.


Navigating a troubled path since leaving the European Union, the Bank of England by August had imposed its largest rate hike in nearly 30 years. The possibility for a recession in the British economy is the result of a "near doubling in wholesale gas prices since May."

And it was no less ominous in the United States, the world's largest economy.

"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Federal Reserve Chair Jerome Powell said during a policy forum in the Wyoming resort city of Jackson Hole. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

By July, analysts at UBS were still somewhat optimistic about the road ahead, saying that global demand for crude oil was holding up against high prices and an economic slowdown. But fears of a global recession saw the price of Brent crude oil fall from $110 per barrel on the last trading day of July to as low as $94.12 one week later.

The outlook, at least for the U.S. economy, had improved by August, however. Retail gasoline prices had fallen by about a dollar per gallon from June highs and consumer-level inflation between June and July was flat.


Also a factor in cooling inflation was the slow untangling of supply chain problems, which were aided when Biden signed the CHIPS and Science Act, designed to increase domestic production of semiconductor chips to ease U.S. over-reliance on foreign-made chips.

"We still have work to do, but we're on track," Biden said of the U.S. economy after signing the bill in August. "We're moving in the right direction."

But then came a surprise decision from the Organization of the Petroleum Exporting Countries and its allies -- a group known as OPEC+ -- to trim monthly production quotas. Biden came home empty-handed after a July visit to Saudi Arabia and the production group started to look like it was catering to Russia, an influential member of OPEC+, rather than the Western powers committed to its protection.

"We continue to believe OPEC+ has a strong desire to defend oil prices above $90 per barrel," UBS analysts wrote after the cartel's surprise decision in September.

Brent crude oil started September at around $92 per barrel. Retail gasoline prices spent much of August in the $4 range, though DeHaan at GasBuddy said $3 is likely by Christmas. The Fed had by August, meanwhile, raised rates by substantial and historic increments -- a half-point hike in May and a pair of 0.75 percentage point hikes in June and July.


Powell, however, wasn't done, implementing two more 75-basis-point hikes in September and November.

"We need to act now forthrightly, strongly as we've been doing and we need to keep at it until the job is done," he said in September.

Meanwhile, the war in Ukraine showed no signs of letting up as Russia worked to annex more territory by way of occupying regions seen as friendly to the Kremlin. European leaders were scrambling still to ensure adequate supplies as the calendar ticked closer and closer to winter.

The United States, meanwhile, was in the grips of politicking ahead of the November midterm elections. It was something of a political test for the nation given that former President Donald Trump, while dealing with everything from an FBI raid of his Mar-a-Lago resort in Florida to accusations of corrupt business practices in New York, tried to stack the deck with favored candidates and election deniers.

Trumpism, however, had a poor run. Democrats recaptured the Senate, just barely, and the Republicans managed to only take a few extra seats in the House of Representatives.

But that did little to resolve global economic challenges. Most forecasts were still pointing to $100 per barrel oil, though gasoline prices -- among the more ubiquitous signs of consumer inflation -- continued to cool.


Falling gas prices and upsets at the polls, meanwhile, did little to improve the mood for consumers. While hiring remained strong, wages weren't keeping up with inflation and concerns about a possible recession were spoiling the mood for American consumers and businesses.

"The outlook is troubling and unsettling," one respondent in the manufacturing sector told the Federal Reserve Bank of Dallas last month. "Caution is the strategy."

Approaching the new year, there are few signs that market conditions, geopolitical pressures or general malaise will improve anytime soon. While global forecasts vary, it would be tough to find an analyst pointing to a lower-for-longer future for commodities.

"Oil prices get back on an upward track," Flynn with The Price Futures Group said. "If demand hangs in there, we're going to see a very tight supply situation into the new year."

Latest Headlines