On the brighter side, Schulze says a lot of the Russian oil that used to flow to Europe, but has been blocked due to sanctions, is now finding its way into China and India. That has eased the upward pressure on global oil prices somewhat, he says, but that still doesn’t fix the growing cracks in the global economic picture.
“Until we can get a resolution to that conflict, you’re going to continue to have that geopolitical premium embedded into energy markets and it’s going to keep inflation a little bit higher,” he says. “There’s definitely the potential for higher structural inflation across the global economy as the Russia-Ukraine conflict continues to drag on.”
The more profound implications, according to Schulze, become clear when one thinks about globalization’s historical role in driving down inflation. Since China joined the World Trade Organization in the late 1990s, increased trade between nations has created a supply-side downward push on prices.
Today, both Russia and China, which has long had a tense relationship with the West, are under greater scrutiny than ever. As geopolitical tensions cause those relationships to fray, there’s increased incentive for countries to onshore production of key products, or import them from allies who are not necessarily able to produce them at the lowest cost.
“The CHIPS Act was passed in the US in July, which is going to bring a lot of US semiconductor manufacturing back home, and not necessarily in the most efficient way or the lowest price possible,” Schulze says. “At the end of the day, I do think that the simmering tension between the West, China and Russia will lead to a period of deglobalization and higher inflation.”
