The Hidden Path of Inflation: How the Ukraine War Affected the Global Economy

A geopolitical shock in one region can move through energy, fertilizer, and food markets before reaching households on the other side of the world. What I observed at the World Bank made that chain of effects impossible to overlook.

Some economic shocks remain close to where they start. Others spread far beyond their point of origin. The Russian invasion of Ukraine clearly fell into the second category, and it became an important part of understanding the inflation that followed. The most immediate cost was human, marked by the loss of innocent lives and the destruction of infrastructure across Ukraine. Yet the economic effects spread well beyond the region, reaching countries far removed from the conflict. I was serving as the U.S. Executive Director at the World Bank during this period, a position that made the global transmission of the shock especially clear in a way that broad statistics alone could not fully convey.

Energy, fertilizer, and the chain reaction

The first transmission channel was energy. The invasion created shortages of fuel and natural gas, and geography played a major role in how those shortages were felt. Europe experienced the disruption much more intensely than the United States because many European economies relied far more heavily on Russian natural gas and oil. It was a clear example of how the same event can have very different effects depending on a country's level of exposure.

The second channel received less attention but may have had an even broader reach. The war also disrupted supplies of fertilizers and grains, and those shortages quickly fed into higher food prices around the world. Fertilizer is an essential input for nearly all agricultural production, so supply interruptions do not remain limited to a single crop or region. They move through the entire food system, increasing costs for producers and, ultimately, for consumers.

"Scarcity of fertilizers and grains that affected food prices around the world."

Who bears the cost of a distant war?

This is where my perspective from the World Bank was especially revealing. The countries hit hardest by rising food prices were often those located farthest from the conflict and least able to absorb the shock. I remember African, Asian, and Middle Eastern countries experiencing sharp increases in food prices, particularly for grains. These economies had no direct role in the conflict, yet they faced some of its most severe economic consequences, including rising staple food costs.

The mechanism behind this deserves attention because it helps explain why food shocks can be so damaging. In lower-income countries, food makes up a much larger share of household spending than it does in wealthier economies. A rise in grain prices that might be manageable in a high-income country can become a real crisis in a lower-income one, where families may already devote half or more of their income to food. The same percentage increase in global commodity prices therefore has dramatically different effects depending on where a household sits in the global economy. A shock that appears modest in the aggregate can be severe in how its burden is distributed. This is why the World Bank Board approved, almost unanimously, a strategy to address food insecurity in both the short and long term.

It is one of the sobering realities of an interconnected global economy that vulnerability is not always tied to proximity. A war in Eastern Europe became a food affordability crisis in regions thousands of miles away. This pattern of cross-border transmission is something I have continued to examine in settings ranging from the World Bank to my more recent academic work, including a lecture at the London School of Economics on monetary policy under the shadow of geopolitical shocks.

The link to the inflation that followed

These disruptions were not simply a side note in the inflation story of the early 2020s. They were part of what drove it. The energy and food channels described here contributed to the inflation that accelerated beginning in 2021. When looking back at the origins of that inflationary period, the geopolitical shock belongs alongside the more familiar pandemic-era supply chain disruptions.

This distinction matters when thinking about inflation going forward. Inflation driven in part by geopolitical disruption behaves differently from inflation driven mainly by domestic demand, and it requires policymakers to pay attention to distinct forces. I have developed this argument across several speeches and publications, including my public remarks as a Federal Reserve Governor and ongoing commentary collected on my Medium author page.

The broader lesson is about interconnection. In a globally integrated economy, the important question is not only what happened but also how far the consequences will spread and who will ultimately bear them. The invasion of Ukraine was, first and foremost, a human tragedy. It also served as a reminder that economic shocks do not stop at national borders and that the households most affected are often those with the least influence over the events that set them in motion.

What this means for reading inflation today

Looking ahead, the experience of Ukraine should make us cautious about explanations of recent inflation that rely on a single cause. The inflation that built through the early 2020s resulted from several forces arriving at nearly the same time: pandemic-era supply chain disruptions, shifts in demand as economies reopened, and the geopolitical shock to energy and food described here. Separating their individual contributions is difficult because they overlapped, and any explanation that emphasizes only one factor risks misunderstanding both the problem and the appropriate response.

It also reinforces the need to take the international dimension of inflation seriously rather than treating it as a secondary issue. For an economy like the United States, it can be tempting to view inflation primarily through the lens of domestic demand and labor markets. The Ukraine shock is a powerful reminder that prices at home can be influenced by events unfolding abroad and that a full understanding of inflation requires recognizing the global channels through which those events are transmitted. That perspective, shaped in part during my time at the World Bank, continues to influence how I think about the forces affecting prices and employment today.

Adriana Kugler, Ph.D., Labor Economist & Georgetown Professor

Comments

Post a Comment

Popular posts from this blog

The Grocery Receipt Tells a Different Story Than the Inflation Report

Prices are cooling in the data, and the public is more worried than ever. The contradiction dissolves the moment you stop treating inflation as one thing. Right now, in 2025 and into 2026, the price pressure people feel most is back where the whole episode started: food and energy, with goods alongside. The cause this time is geopolitical rather than pandemic logistics . Tariffs have added up to 0.7 percentage points to goods prices over the past year and a half. The war involving Iran has pushed energy costs up, since roughly 20 percent of the world's oil moves through the Strait of Hormuz, which has been under blockade for several months. And because somewhere between a quarter and a third of globally traded fertilizer passes through that same strait, food prices have climbed too. These are the prices households meet weekly and sometimes daily, at the pump and the checkout, which is why this latest pressure lands so hard on the public mood. And that brings up a puzzle worth sitti...
Read more

A Supply Shock Has Two Acts. We Keep Watching Only the First One

Higher prices are the headline. The slow erosion of demand that follows is the part that actually decides how rough the landing gets. Picture a negative supply shock the way most coverage frames it. Costs jump, growth gets pinched, and the economy ends up in that uncomfortable spot where prices climb while activity drags. That framing is not wrong. It is just incomplete, and the missing half happens to be the half that matters more for where growth goes next. Having spent years studying economies at very different stages of development and having sat on the Federal Open Market Committee as these questions played out in real time, the pattern I keep coming back to is this: A supply shock is not one shock. It is a first shock that can summon a second one. The initial blow lands on supply and shows up as inflation. Then, with a lag, it can reappear on the other side of the economy as a negative demand shock. And that delayed second act is usually where a real slowdown takes root. The ear...
Read more

Buying AI and Using It Well Are Two Different Things

Adoption headlines suggest a technology sweeping through the economy. The harder question is whether companies are building anything new with it, because that is what actually shows up in growth. Here is a number you have probably seen some version of: roughly one in five firms and businesses are now adopting AI, according to Census data . It sounds like a technology spreading fast. And in a sense, it is. But adoption figures answer the easy question, the one about whether companies have brought the tool in the door. They say nothing about the harder and more important question, which is what those companies are actually doing with it once it arrives. That second question is the one I care about, because it is the one that decides whether all this activity adds up to a stronger economy. A tale of two adopters Imagine two companies that both report adopting AI. They look identical in the statistics. The first uses AI to trim expenses. It automates a few routine tasks, speeds up some pap...
Read more