Europe

How is the Ukraine war affecting the cost of living crisis?

The war in Ukraine is fuelling a cost of living crisis. On Tuesday, Eurostat said 12-month inflation in the Eurozone stood at 8.1 per cent – the highest figure ever recorded by the European statistics office. 

This is squeezing households across Europe, with 83 per cent of Spanish families, 80 per cent in the UK, 76 in Italy, 66 in France, 65 in Denmark and 62 in Sweden all reporting rising day-to-day costs in a YouGov Poll. 

It’s not just Europe; far from it. Populations in the Middle East and Africa are under immense pressure as the fallout from Russia’s invasion of Ukraine spills across the globe. 

In April, the head of the IMF warned the war in Ukraine was creating the risk of “shortages” and “social instability” in these regions by driving higher prices. But how is the Ukraine war contributing to the current crisis? 

1. Food

A key reason why households are feeling the pinch is that global food prices have risen to their highest levels since the Russian invasion, as the UN has acknowledged.  

Before the war, Ukraine was the fifth largest wheat producer and largest sunflower oil producer in the world.  

Most of this was exported from Ukraine to other countries by ship. However, Ukraine’s major ports on the Black Sea, particularly the southern city of Odessa, are currently facing a Russian blockade. 

This has meant that less wheat can leave the country, which in turn is causing prices to rise as supplies grow more scarce. 

“Wheat is number one,” says Dr Tyler Kustra, an assistant professor in politics and international relations at the University of Nottingham. “It is one of the most primordial commodities you have out there. Humans could not survive without grain.”

World wheat prices soared by 19.7 per cent during March, according to the Food and Agriculture Organization’s monthly food price index, hitting a record high along with prices of barley and sorghum.

Africa and the Middle East are particularly vulnerable, Dr Kustra said. “Egypt and Iraq import practically all their wheat from Ukraine, which is causing severe concern. I expect more instability in the region because of this.

“As difficult as it is for people in the UK, we can mostly afford another few pence here and there. Someone in Egypt who is barely hanging on is going to be in trouble.”

The European External Action Service has claimed Russian’s invasion is aggravating price rises by disrupting Ukraine’s production capacity. 

In a tweet published on Monday, the EEAS alleged Russian forces were “deliberating targeting and destroying agricultural machinery, food stocks, production and processing, and transport capacities in Ukraine.” 

Another major knock-on effect of the war in Ukraine is on animal feed, says Dr Hilary Ingham, a senior lecturer in economics at Lancaster University. 

Price rises, she said, “are going to feed though into the cost of other foodstuffs, with some suggesting that chicken will become more expensive than beef.” 

2. Oil

The second major area where the conflict in Ukraine is propelling the cost of living crisis is energy. 

Russia is a major player in global energy markets, one of the world’s top three producers of crude and home to approximately a quarter of the planet’s known natural gas reserves. 

The EU, UK and US have moved to stop importing Russian energy in a bid to hamstring Russia’s ability to finance its war effort, with the EU endorsing a partial ban on Russian oil on Tuesday. 

These political tensions, alongside the trade and production disruptions caused by the Russian invasion, have caused energy prices to leap. 

In April, the World Bank forecast that average energy prices would jump by 50 per cent this year: the biggest increase since the 1970s. 

The main issue with such hikes, Dr Kustra says, is that demand for oil is relatively fixed. “If the price of oil rises, it doesn’t mean you can drive half as much. You still need to pick the kids up, drive to work and go to the shops. The problem is not with things like a Role. Inflation is going up on stuff you have to buy.”

 Like animal feed, oil price rises also feed into the wider economy. “We use oil for pretty much everything,” says Dr Kustra. “Any good you purchase has to be transported, which means that oil price increases cause prices to rise across the board.

“What we are going through is a 1970s-style shock where the ability to produce things cheaply has gone away and the economy is strained.”

Oil prices soared after the Russian invasion of Ukraine, reaching €118 or $116 per barrel on March 8, 2022. It is hoped that prices will stabilise soon.

3. COVID-19

The opening up of economies after the coronavirus pandemic is also helping engender the cost of living crisis. With the easing  of restrictions, demand has skyrocketed, placing pressure on global supply chains.  

Following the pandemic oil wells were shut off across the world as demand dropped off a cliff. Restarting oil production has come at a significant cost and there remain supply bottlenecks, made worse by sanctions on some key players including Russia. 

Still, spiralling food and energy costs, alongside the continuing impact of COVID, are not the only reasons behind the on-going spike in living costs.  

Inflationary pressure is everywhere,” said Dr Ingham. “Supply shortages due to ongoing lockdowns in China, wage inflation – certainly in the UK – in sectors such as hospitality and road haulage, and the war… Things are really in a bit of a turmoil at the minute.”

Source: Euro News

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