Talk about fighting the last war with little ammunition.

In his State of the Union address, President Biden belatedly recognized that the country had an inflation problem, although he was very careful not to assume any blame for that problem. He has done so at the very time that the Russia–Ukraine crisis and the start of an interest-rate-hiking cycle make it all too likely that the real problem the country will soon be facing will be one of stagflation, which is the painful combination of high inflation and stagnating output.

After spending much of last year assuring us that inflation’s resurgence was but a temporary problem largely caused by global supply-chain disruptions, Biden has finally come around to feeling the electorate’s inflation pain and to believing that inflation will be with us for longer than he had earlier anticipated. With consumer-price inflation having increased month after month to reach a 40-year high of 7.5 percent, it would seem that he had little alternative but to come to terms with reality.

While now at least recognizing the inflation problem, Biden continues to deny that there was any connection between inflation and the $1.9 trillion American Rescue Plan, which he rushed through Congress in March 2021. Never mind that the Rescue Plan contributed to the country’s largest peacetime budget stimulus on record at the very time that the economy was recovering strongly and that the Federal Reserve had its pedal to the monetary-policy metal. Worse yet, Biden keeps pushing for the early approval of parts of his Build Back Better program, even though they would be bound to add to the country’s budget deficit.

The key economic risk to which the Biden administration is choosing to turn a blind eye is that the Russia–Ukraine crisis, coupled with the start of a Fed interest-rate-hiking cycle, could prove to be the trigger that causes the bursting of today’s U.S. equity, housing, and credit-market bubbles. It could do so by putting an end to the idea of an indefinite continuation of ultra-low interest rates and of strong economic growth, on which those bubbles have been premised.

By threatening the supply of key commodities, Russia’s invasion of Ukraine all but guarantees that over the next few months there will be a significant pickup in U.S. inflation from its already high level. International oil prices have already climbed to a seven-year high of some $110 a barrel. That alone could add something like 1.5 percentage points to U.S. inflation. At the same time, grain prices are now skyrocketing on the fear that Russian and Ukrainian wheat exports will be disrupted, while doubts have surfaced about the continued supply of a number of key metals of which Russia is a dominant producer.

Beyond adding to inflation, the Russian–Ukraine crisis is dampening animal spirits in the financial markets by increasing geopolitical uncertainty. Since the start of the year, U.S. equity prices have declined by more than 10 percent, interest rates on risky loans have increased, and there has been a generalized flight of capital to the safety of the dollar.

With financial markets already experiencing heightened volatility, the last thing that they need is for the Federal Reserve to embark on an interest-rate-hiking cycle. Yet, as Fed chairman Jerome Powell made clear in his very recent congressional testimony, that is precisely the direction in which the Fed is now headed. With inflation likely to be boosted by the Russian oil-price shock to more than three times the Fed’s inflation target, the Fed would seem to have little alternative but to raise interest rates to prevent inflation expectations from becoming unanchored.

Should the Russian crisis together with higher interest rates be the trigger that causes the U.S. asset-price and credit-market bubble to burst, the U.S. economy could have a hard economic landing. If that proves to be the case, Biden will have to explain not only why inflation spiked under his watch but also why the economy relapsed into recession.