The conflict in Ukraine has led to an increase in energy prices, which are pushing up inflation. Not only the energy sector is affected, but also agriculture, soft commodities and industrials.
The war has only strengthened and accelerated an already existing trend. Indeed, after more than a decade of low and stable inflation, 2021 has seen a significant increase in prices, going to intensify the high cost of living.
The rise in energy prices and supply chain difficulties are leading to a surge in consumer price indexes compared to what central banks had previously predicted.
Among economic experts, there are those who predict a stagflation scenario. From such a perspective, economic policy will have the mission of countering inflation by trying not to burden an already progressively slowing monetary cycle. From the fiscal point of view, the situation is also on the same level: from a delicate phase that was thought to be over, from which enormous public debt arose due to the fight against the pandemic, we have moved on to a historical moment in which it is necessary to deal with huge expenditures in the military and defense sector.
As happens at any time of crisis, there are heated debates and different schools of thought among economic experts.
There are those who see this inflationary phase as temporary and therefore believe that no action should be taken to cool the economy, as it could block an effective restart.
On the other hand, other theories argue that until central banks intervene by raising interest rates, inflation will continue for a long time because of the expectations of economic players.
Then there is a third current of thought that assumes the possibility of using "unconventional" tools to limit inflation. Those who support this theory highlight that current inflation is a phenomenon that arises in some specific sectors of the economy, where there have also often been dramatic increases in profits. A possible solution, therefore, would be to try to stop price increases in those specific areas with targeted measures.
First, given the high level of uncertainty resulting from the current crisis in Ukraine, the immediate priority is to safeguard financial operations and not undermine consumer trust: this in order to contain the impact of the shock on the real economy and preserve the conditions for smooth implementation of monetary policy.
Second, the recovery must be accompanied in a balanced manner through prudent and gradual interventions as the consequences of the current crisis become clearer.
Given the ongoing situation, it is likely that both stock markets and bond markets will fall. It may then be an advantage for investors to favor investments in real assets and cherry-picking: active selection and management of underlyings to be included in the portfolio over merely passive management. The companies that will give the highest satisfaction and returns to their shareholders and bondholders are those with some market power, and that will be able to pass on higher production costs to prices, defending their margins. The expert eye of financial advisors and analysts becomes crucial in identifying which companies are best structured to withstand the shock and ensure sustainable growth in the medium to long term.
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