01 Mar 2022 3 min read

Ukraine conflict: the inflation dimension

By Christopher Jeffery

In the second post of our blog series, we look at how Russia's invasion of its neighbour might impact consumer prices in developed markets.

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The conflict in Ukraine has serious implications across many dimensions, with ripples being felt all over the world. I’ll leave it to the geopolitical strategists to opine on the upheaval to the rules-based world order that has prevailed since the end of the Cold War. I’m going to focus on the more prosaic issue of the impact on the ‘pound in our pockets’.

Inflation in North America and Western Europe is already at deeply uncomfortable levels. UK consumer price inflation came in at 5.5% in January, with the retail price index (RPI) hitting an eye-watering 7.8%. That is before the impact of the increase in oil and food prices in recent weeks, as well as the huge uplift in domestic energy bills that is coming in April.

In recent months, it feels like inflation forecasting has become an uncomfortably iterative process: take your previous forecast and add a couple of percent. The chart below shows the evolution of the market-implied path for RPI in the UK. Six months ago, the peak was expected at 5%. Three months ago, that shifted to 7%. Today, it is just over 10%. Charts for the US or Eurozone look remarkably similar.

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As the Ukrainian conflict develops, we can draw parallels with the last time RPI inflation hit double digits. That episode came in the autumn of 1990 as oil prices spiked at the start of the Gulf War. The big difference between then and now is that monetary authorities were in a totally different place in 1990 – policy rates were at 8.25% in the US and 15% in the UK. Today, they are at 0.1% and 0.5% respectively.

1990s redux?

In 1990, policymakers could afford to absorb the shock to consumers by cutting interest rates: we saw UK policy rates drop by 100 basis points (bps) and US policy rates drop by 125bps as the Gulf War raged on.

In 2022, given the very different macro backdrop, it is impossible to imagine the same response. In the past few days, a number of central banks have hedged their bets, but left the impression of a stoic determination to continue the policy normalisation that is now in store.

We’re often asked whether we think this bout of inflation is likely to prove transitory or persistent. That feels a bit like being asked if we believe in God. We can give an answer, but it would be more based on faith than analysis.

The uncomfortable truth is that no-one has a particularly accurate model of how the inflation process works, although we can all cite phrases that sound knowledgeable (“always and everywhere a monetary phenomenon”, “too much money chasing too few goods”, “non-accelerating inflation rate of unemployment”).

Instead, we believe it pays to focus on the things that are knowable. We don’t know if we’re entering an era of high inflation, but we do know that we’re already in an era of high inflation concern. That concern has been amplified by events in Ukraine.

The troop mobilisations in Russia and Ukraine are the largest such deployments in Europe since the Second World War. We believe a slogan from that era is the best guide to the likely actions of monetary policymakers in 2022: “keep calm and carry on (raising interest rates).”

Related content:

  • Sonja Laud, our CIO, on what the conflict means for markets, the world economy and how we manage our clients’ assets


Unless otherwise stated, information is sourced from LGIM analysis as at 28 February 2022.

Views expressed are of Legal & General Investment Management Limited as at 28 February 2022. Forward-looking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon. There is no guarantee that any forecasts made will come to pass. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision.

Christopher Jeffery

Head of Macro, Asset Allocation

Chris is Head of Macro within LGIM’s Asset Allocation team. He oversees LGIM’s Economic Research, Rates and Inflation, and the Multi-Asset Strategists and idea generators. He joined LGIM in 2014 from BNP Paribas Investment Partners where he worked as a senior economist and strategist within the Multi-Asset Solutions group. Prior to that, he worked as an economist within monetary analysis at the Bank of England with a focus on the UK domestic economy. Chris graduated from University College, Oxford in 2001 with a first class degree in philosophy, politics and economics. He also holds an Msc in economics (research) from the London School of Economics and is a CFA charterholder.

Christopher Jeffery