Howard Schneider, Balazs Coranyi

WASHINGTON/FRANKFURT – While Russia’s attack on Ukraine might slow down global growth and create new risks for the economy, central banks around the world are focusing on an intensifying inflation battle.

Europe could be most at risk from a wider economic shock caused by the war. But the European Central Bank said Thursday that while the region could absorb any expected impact on economic growth, it couldn’t pay for policymakers turning their backs to rising prices across the euro area.

In a surprising move, the ECB called the war a “watershed point” and accelerated the termination of one its most important pandemic bond buying programs. This opened the door to possible interest rate rises later in the year.

Christine Lagarde, President of the ECB said in a conference that the economy can weather shocks from war and stricter policies and still grow “robutly” in 2022. However, supply disruptions are showing some signs of easing. Partially, the impact of the huge energy price shock may be mitigated by using savings that were accumulated in the wake of the pandemic.

It’s possible to slice inflation however you wish, and if we look at core measures, they are all above target and increasing. One ECB policymaker asked to remain anonymous because they have a 2% mandate. We are failing it.”

The United States had a similar story. Officials weighed economic risk in response to the sudden rise in global inflation.

The Russian invasion of Ukraine on February 24th sparked a sell-off of global equity markets. It also increased financial market stress and most importantly, it pushed up oil prices.

None of this has indicated a systemic issue, at least so far. Officials from the Fed and other central banking institutions have stated that they feel confident in market protections. Stress metrics haven’t increased in relation to previous financial shocks. West Texas Intermediate crude oil traded Thursday at $107 per barrel on Thursday, down from the $130 price earlier this week.

For policymakers, it is more important that global economic growth continues above trend in large parts. They can then focus their attention on inflation running much faster than the common 2% benchmark.

In January, the Bank of Canada increased interest rates. Next week, the Fed and Bank of England are likely to follow suit. Expect each to offer more in the months ahead.

Even fiscal policy officers, who are more aware of political economic developments than others and cheerleaders for looser central banks policies, know the destructive power of price rises.

Janet Yellen, Treasury Secretary said that inflation “is of great concern” in a Washington Post Live interview on Thursday. The impact on Americans is severe. They worry about their basic financial issues.The U.S. released new data Thursday showing that consumer prices increased at 7.9% annually in February. This is the highest rate of inflation in over 40 years. Now, investors expect that the Fed will raise the target federal funds rates to between 1.75% & 2% by the year’s close. That is a quarter of a point more than they had expected last week.

Bank of Japan, which is the outlier of major central banks, is the Bank of Japan. There is a possibility that the war will also increase inflation pressures. However, the recovery from pandemics is not yet complete and tightening policy is not likely.