It’s a one-two punch for stocks right now: the combination of soaring inflation and a crisis in Eastern Europe. Russian President Vladimir Putin, an ex-KGB colonel and a master at disinformation, is keeping the world guessing as to his intentions with Ukraine.

Winston Churchill famously defined Russia as “a riddle, wrapped in a mystery, inside an enigma.” Russia’s next move in the Ukraine standoff is uncertain and if there’s anything Wall Street hates, it’s uncertainty.

Russia asserted Tuesday that it was withdrawing its troops from the Ukrainian border, sparking a relief rally in global equities. But verification of the withdrawal remains elusive. On Wednesday, the major U.S. stock indices closed mixed in volatile trading, with the Dow Jones Industrial Average and the NASDAQ down 0.16% and 0.11% respectively, but the S&P 500 and Russell 2000 up 0.09% and 0.14% respectively.

Reports surfaced Thursday that the Ukrainian government was shelling Russian-backed rebels. In early trading, the unexpected (and dubious) news pushed U.S., European, and Asian equities into the red.

Media hysteria doesn’t help, especially when some U.S. news outlets muddy the waters by regurgitating pro-Russian propaganda. Yes, Putin is an authoritarian kleptocrat who murders his enemies, but he has a constituency among Americans who are drawn to political strongmen. The geopolitical noise is weighing on stocks.

Meanwhile, the U.S. Labor Department reported Tuesday that the producer price index (PPI), which measures wholesale prices, jumped 1% in January and 9.7% for the 12-month period, the latter number close to the record high. Core PPI (excluding volatile food and energy components) rose 0.9%. Both increases more than doubled the consensus estimates (see chart).

The PPI differs from the consumer price index (CPI) in that it measures costs from the standpoint of industries that make products, whereas the CPI measures prices from the perspective of consumers.

Read This Story: Straight Talk About Inflation

The latest PPI report provides the Federal Reserve additional leeway to hike rates aggressively this year and boosts the odds of a 50-basis-point hike in March. Rising wages, the sluggish recovery of manufacturing capacity, and increased consumer demand for durable goods are major factors driving inflation.

The good news is that consumers continue to spend at a healthy clip. The Commerce Department reported Wednesday that consumer spending rose in January, defying rampant inflation. For the month, retail sales rose 3.8%, beating the consensus estimate of 2.1% (see chart).

Consumers might be inclined to curb spending, though, if inflation keeps getting worse. Pain at the gasoline pump is a salient detriment to consumer sentiment. Crude oil prices are approaching $100 per barrel, with demand outstripping supply. A lack of investment in oil production in recent years is impeding the ability of oil producing nations to increase production. What’s more, geopolitical turmoil puts upward pressure on crude prices.

Food costs are spiking as well. Extreme weather and supply chain disruptions are boosting prices for agricultural commodities. Visits to the gasoline pump and grocery store have become demoralizing experiences for consumers.

The prices of all manner of commodities are on a rapid ascent, leading many analysts to worry about cost-push inflation. Cost-push inflation is caused by rising prices for vital goods that have no alternative.

As the prices of commodities and industrial inputs rise, eventually those cost increases push through the chain to the end consumer. An excellent example of cost-push inflation occurs when oil prices rise, pushing up the price of jet fuel and forcing airlines to either raise ticket prices or add fuel cost surcharges to ticket fares.

The stealthy wealth destroyer…

Taxes on capital gains, dividends and nominal interest on investments are not inflation-indexed. Neither are various income taxes in some states. Unprepared investors could face higher “stealth taxes” and suffer significant wealth destruction as inflation becomes more prominent.

As inflation and taxes keep rising, investors will need higher nominal sums to keep up with retirement expectations in the face of deteriorating purchasing power. This problem is pervasive for every income level and asset class and exacerbated by the fact that 401k plans and Individual Retirement Accounts (IRAs) incur capital gains taxes when funds are withdrawn.

Looking for an inflation hedge? Consider gold. Surprisingly, the price of the yellow metal has remained essentially flat in recent months, which means it’s probably poised for a bull run.

When markets gyrate and investor fear increases, historically the price of gold has tended to skyrocket. The double whammy of rising inflation and overseas conflict is generally bad for stocks, but great for gold. For details about our favorite gold play, click here.

John Persinos is the editorial director of Investing Daily.

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