The war in Ukraine could add 3% to global inflation this year and wipe trillions off global gross domestic product (GDP) by 2023, a new report says.
According to the National Institute of Economic and Social Research (NIESR) the war could erase the level of global GDP by 1% or $1tn (£750bn) off the world's GDP by next year.
NIESR expects a reduction in UK GDP growth by around 0.8% to 4% in 2022 and 0.5% in 2023, and inflation to average 7% this year and 4.4% in the next year. This marks an upwards revision from our February forecast, which predicted 5.3% and 2.7% respectively.
Britain's annual inflation is already running at a 30-year high and the Bank of England predicts it will top 7% in April.
The UK economy grew 7.5% last year, its strongest growth since the second world war, thanks to a rebound in the spring when lockdown restrictions eased.
This was the biggest rise in 80 years, since 1941, and meant the UK also posted the fastest growth in the G7 after a 9.4% fall in GDP in 2020, according to the Office for National Statistics.
"The inflation cycle may be stoked further if central banks choose, which they are likely to do so, to stay their hands in the face of war," said professor Jagjit S Chadha, director of NIESR.
It comes as markets are bracing for more supply chain chaos due to Russia and Ukraine's key role in energy and commodity trade, from oil and gas to wheat, corn and palladium.
The think tank argued this would fuel global inflation and posed a risk to economic growth.
It added that while higher oil and gas prices would partly mitigate the impact of sanctions on Russia, GDP in the country would still contract by 1.5% this year and more than 2.5% by the end of 2023.
Europe is expected to be the region most affected due to its trade links and a reliance on Russian energy and food supplies, with emerging markets affected less than advanced economies.
Chadha added, the think tank anticipates higher public spending "to support a massive inflow of asylum seekers" from Ukraine and bolstering military spending, will limit adverse effects on European GDP.
Experts say, soaring energy prices are ratcheting up fears of "stagflation" as benchmark oil prices soared above $111 a barrel on Wednesday to a multiyear high as officials warned that global energy security is under threat amid the Ukraine crisis.
"Anxiety is again rippling through global financial markets with the fear of stagflation taking hold, as the Ukraine conflict ratchets up inflationary pressures and threatens to derail global growth," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Brent (BZ=F) was up 6% to $111.3 a barrel. The oil benchmark topped $105 a barrel in intraday trading last week, breaching that level for the first time since 2014. US light crude (CL=F) rose over 5.8% to $109.44.
However, with US president Joe Biden under increased pressure to halt crude imports from the Kremlin, "hitting Russia even harder with boycotts will cause sharp ricochet of financial pain" Streeter said.
"The worry is that it will do little to break Russia’s immediate resolve, which could lead to a long drawn out economic conflict," she added.
The latest run-up came after members of the International Energy Agency (IEA) agreed to release supplies from their oil reserves and despite efforts by the west to exclude oil and gas from their sanctions on Russia.
Read more: How economic sanctions work
Meanwhile, there have also been concerns that the crisis will drive food prices higher after wheat hit $10.23 a bushel — a 14-year high.
Corn prices also rose to the highest level since 2012, when there was a drought in the US as well as wildfires across Russia and Ukraine.
Russia and Ukraine, account for 20% of the global wheat and corn market, the Kremlin is also the biggest exporter of ammonium nitrate, which is used in fertiliser.
Experts say that surging oil and wheat prices paint a bleak picture for inflation as the conflict upends the global commodity market sending both energy and agricultural prices to their highest levels in years.
Watch: How does inflation affect interest rates?