The invasion of Ukraine by Russia has sent oil prices soaring to their highest levels in more than a decade. They crushed hopes of a strong global rebound from the coronaviruses crisis.
Wall Street analysts are talking about the worst nightmare for investors: Stagflation.
Stagflation, what exactly is it?
Stagflation is caused by high inflation and a stagnant economy.
It was the defining economic term of the 1970s, a decade in which the US entered a crushing recession, but inflation soared above 12%.
The economists were shocked by the stagflation of the 70s. When the economy slowed, the consensus was that inflation would cool because fewer people would be buying goods and services.
It has the ability to shock investors.
Why are markets worried?
Russia's war in Ukraine has lit a fire under global commodities prices, thanks to the importance of both countries as providers of raw materials.
Despite the US and its allies steering clear of directly hitting Russia's energy sector with penalties, Western buyers have been self-sanctioning and shunning the country's oil.
The US benchmark oil price surged to a 14-year high of over $116 a barrel on Thursday, while the international benchmark oil price hit a 12-year high. They were trading around those levels Friday.
It is not just oil. Natural gas, industrial metals, and wheat have all increased in price. Over the last month, the S&P global commodities index has shot up around 20%.
The US is already running at a 40-year high in inflation, and there are fears that it could go even higher.
Central banks could be forced to hike interest rates harder and faster to bring prices under control if the economy slows. They are worried that people will spend less as items become more expensive.
The war in Ukraine and the related energy market turmoil could derail the Fed's monetary policy plans, and reveal which countries are best placed to ride out the turmoil.
Mario Centeno, an official at the European Central Bank, warned in a speech Wednesday that there are someflation scenarios in front of us.
The Atlanta Federal Reserve predicted on March 1 that US growth would be roughly flat in the first quarter, following a rapid growth rate in the final quarter of the year.
Powell said that the US economy still looked strong, but that the likely effects of the Ukraine conflict remain uncertain.
Why is it bad for markets?
Stagflation clouds the outlook for investors. When and how much interest rates will be raised by the central banks is a guessing game for traders and strategists.
If the economy slows, companies will suffer as people spend less, even as inflation adds to their costs.
If the war in Ukraine drags on, a portfolio of global stocks, bonds and real estate could end up losing more than 10%.
US stocks could fall 20% from their pre-invasion levels if the Fed raises rates sharply, according to analysts led by Thomas Verbraken.
Can it be avoided?
In the US, where growth is expected to stay strong in 2022, many investors say worries about the economy are overblown.
Brian Rauscher, head of global portfolio strategy at Fundstrat, told Insider that he was not worried about it.
We think this is going to be a challenging early part of the year, and then inflation is likely to peak.
The first part of the year is a good time for investors to be cautious.
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