Featured Image

A Direct Attack!

• Russia initiated military operations in Ukraine on 02/24/2022. At this point there is not enough information to estimate a full economic impact of this activity.

•The short term market reaction appears to be inflationary, particularly for the energy and commodity sectors.

• We estimate that if Brent crude were to rise to $120/barrel oil price, the Producer Price Index (PPI) impact would be +1.7% and the Consumer Price Index (CPI) Index impact would be +1.0%.


• The follow-on impacts to the goods producing sectors are likely to be inflationary and constructive for inflation-sensitive sectors including commodities, real estate, materials and energy equities, along with active fixed income.


At the time of this writing, Russia had initiated military operations in Ukraine and the initial impact on markets outlined two weeks ago in our piece Russo-Ukrainian Crisis and Energy Markets has come to fruition. The initial price moves on both Brent and natural gas were up 6% on the news.1

It is far too early to speculate upon the both the short- and longer-term economic impacts at this stage. However, it should surprise no one that this direct attack was designed to inflict economic pain as only the Russians could, via commodities.

If these energy price levels hold, they could serve to make the commodities-goods driven inflation matters in the U.S. worse. These are the cost-push, goods-based components which have been driven the spike in headline numbers in both the PPI and the CPI.

Energy Component Impacts to Inflation Indices

A rise in energy prices has a disproportional impact on overall prices as measured by the PPI than the CPI, although both are currently significant given the approximately 40% YoY increase in energy commodities.

20220301-chart-1Furthermore, the highly volatile PPI Commodity Index is regarded as a leading indicator for changes in the CPI as the CPI vs PPI chart below illustrates:

20220301-chart-2What is the potential impact of a 25% increase in Oil?

CPI - A 25% rise in Brent crude (from January’s $87/barrel average) would be $109/barrel3. This increase by itself would result in approximately a 1% increase to the headline CPI number, pushing it into the 8% handle range, assuming all else being equal.

PPI - The PPI is more difficult to predict, because results are obtained from final demand in which energy would logically have a lower weight given its higher price, but the impact would be larger than in the CPI all else being equal. A study4 by the Federal Reserve Bank of St. Louis estimated that the correlation of PPI and CPI to oil was 0.71 and 0.21 respectively. The lower correlation of CPI is due the fact that services weighting in the CPI is much higher. Using this estimate, if oil were to rise 25% we would estimate the PPI to increase 1.70%.

With uncertainty around longer term impacts from the Russia actions in Ukraine, the follow-on impacts to the goods producing sectors are likely to be inflationary and constructive for inflation-sensitive sectors including commodities, real estate, materials and energy equities, along with active fixed income.

Important Disclosures & Definitions

1 Bloomberg, as of 02/24/2022

2 Source: Bureau of Labor Statistics

3 Source: Statista – UK Brent Crude Oil Monthly Price Development

4 Source: St. Louis Fed Blog

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.

Consumer Price Index (CPI): a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services.

Producer Price Index (PPI): a measure of the average change over time in the selling prices received by domestic producers for their output.

One may not invest directly in an index.

Distributed by ALPS Portfolio Solutions Distributor, Inc.

APS001913  03/31/2023

Recent Two Minute Tuesdays