Despite the likelihood of rising inflation, the conflict in Ukraine is unlikely to impede economic growth in the U.S.

• The Russia-Ukraine conflict is predicted by economists to cause an increase in global inflation, although it is unlikely to lead to a recession.
• The economic impact of the two countries as major exporters and producers of essential components for semiconductor production will be significant.
• While Russia's total economic output is smaller than New York state's, Ukraine's GDP is roughly equivalent to Nebraska's.
• The Fed is predicted to start raising interest rates in March and continue until 2023, according to market expectations.

The cost of food and gasoline is likely to increase, and the supply chain issues that have impacted the economy for the past two years may continue or worsen.

Is it possible that the Russia-Ukraine conflict could cause a recession in the U.S. economy? While it seems unlikely at present, anything is possible.

"According to Wells Fargo chief economist Jay Bryson, the rise in oil prices and initial retreat of equity prices have resulted in a mild stagflationary hit to the economy. This will increase inflation and slow growth, but it is unlikely to cause a recession."

That view is in line with most Wall Street economists.

With inflation at its highest level since the early 1980s, the last thing consumers need is more price pressure. Grain and energy commodity prices have surged in recent weeks, causing West Texas Intermediate prices to increase by about 22% in 2022 and wheat to rise by double digits, before falling sharply on Friday.

The economic impact of the two nations as major agriculture exporters and producers of critical elements for semiconductor manufacturing will be significant, but not catastrophic for the global economy that is still recovering from the pandemic.

"Gasoline prices are increasing, which may impact consumer confidence. However, it is unlikely that consumers will reduce their spending due to this, as the receding omicron and reopening of things provide a countervailing force, according to Bryson."

Two comparatively small economies

Despite their agricultural abundance and Moscow's military strength, neither country is a significant economic power.

New York state's economic output is greater than Russia's, while Ukraine's GDP is roughly equivalent to Nebraska's. Together, these two countries contribute to approximately 30% of the world's wheat exports and 80% of global sunflower seed production, according to Capital Economics.

Financial markets have been impacted by rising tensions, exacerbating concerns about tighter policy from central banks such as the U.S. Federal Reserve.

"Higher oil and natural gas prices will have a significant impact on inflation in advanced economies, according to Capital Economics forecasters. While it is possible that average inflation could still reach 4% by December, policymakers will need to carefully consider the potential risks to both inflation and economic activity."

The Federal Reserve is expected to start raising interest rates in March and continue doing so until 2023, with traders anticipating up to seven quarter-percentage-point hikes this year, which would mean one hike at each Federal Open Market Committee meeting.

The combination of that prospect and geopolitical turmoil could make for a bad mix, causing stocks to plummet and bond yields to rise.

"According to Goldman Sachs economists Joseph Briggs and David Mericle, the impact of tighter financial conditions is the most uncertain factor. While past geopolitical risk events have rarely led to a meaningful tightening in U.S. financial conditions, it is difficult to generalize to the current situation. A larger tightening in financial conditions and an increase in uncertainty facing businesses would further weigh on U.S. growth."

According to Goldman, a $10 increase in oil prices would result in a 0.035 percentage point increase in core inflation and a 0.2 percentage point increase in headline inflation, but would only negatively impact GDP by 0.1 percentage point, which is following its fastest full-year growth since 1984.

If geopolitical risk tightens financial conditions and increases uncertainty for businesses, the growth hit could be somewhat larger, the economists said.

Goldman stated that it believes the events in Ukraine will not prevent the Fed from raising interest rates. While past crises have led the Fed to loosen policy, the firm emphasized that the current inflation risk provides a more compelling reason for the Fed to tighten today than in previous instances.

This week, Fed officials stated that they are closely monitoring the situation, but they did not indicate any intention to alter their stance on tightening. Fed Governor Christopher Waller, speaking on Thursday, emphasized that there is a compelling argument for a 50-basis-point hike in March if the labor market remains strong and inflation persists.

This week, Richmond Fed President Thomas Barkin likened the ongoing conflict to Russia's annexation of Crimea in 2014 and stated that the event had minimal economic consequences.

"If the evolution of this is similar to 2014, I believe there will be little change to the fundamental logic I've discussed," Barkin stated. "However, this is unknown territory and we'll have to determine the direction the world takes."