Introduction
The global economy is increasingly confronting the challenges posed by inflation, which has become a persistent issue in many countries. Traditionally, inflation has been attributed to factors such as monetary policy, demand-supply imbalances, and fiscal deficits. However, there is a growing recognition that ecological factors play a significant role in driving inflationary trends. This article explores the concept of inflation as an ecological phenomenon, examining how environmental degradation, climate change, and energy dependencies reshape our understanding of inflation. It argues that addressing these ecological drivers is essential for stabilising prices and achieving sustainable economic growth.
Fossilflation: The Role of Fossil Fuels in Driving Inflation
One of the most significant ecological drivers of inflation is the reliance on fossil fuels, a phenomenon now referred to as fossilflation. Fossilflation describes the inflationary pressures from the global economy’s dependency on fossil fuels. This dependency has become particularly evident in the context of recent international events, such as the energy crisis that followed Russia’s invasion of Ukraine. The direct effects of fossil fuels on inflation are manifest in the rising energy prices that have significantly contributed to elevated Consumer Price Index (CPI) figures across the globe (Barmes and Schröder Bosch 2024).
The indirect effects of fossil fuels are equally profound. Energy is a critical input in the production and transportation of goods and services, meaning that fluctuations in energy prices have a cascading effect across the entire economy. These fluctuations are especially evident in sectors with high energy intensity, such as transportation and manufacturing, where energy costs contribute disproportionately to overall inflation (Barmes and Schröder Bosch 2024). As long as economies remain reliant on fossil fuels, the volatility of energy markets will continue to pose a significant threat to price stability.
Climateflation: Climate Change as an Inflationary Force
Beyond fossil fuels, climate change is emerging as a critical driver of inflation, a phenomenon increasingly referred to as climateflation. The impact of climate change on inflation is primarily channelled through its effects on agricultural productivity. Extreme weather events such as droughts, floods, and heat waves have increasingly disrupted food production, leading to sharp price increases (Kotz et al. 2023). For instance, studies have shown that temperature shocks can lead to significant increases in food prices, with some estimates suggesting that the hot summer of 2022 increased food inflation in Europe by 0.67 percentage points (Kotz et al. 2023).
Climateflation is not merely a domestic issue but a global one. The interconnectedness of international food markets means extreme weather events in one region can have far-reaching inflationary impacts worldwide. Disruptions in agricultural production due to climate change can lead to higher global food prices, which in turn contribute to inflation in countries that rely heavily on food imports (Barmes and Schröder Bosch 2024). This global dimension of climateflation underscores the need for coordinated international responses to manage its impacts effectively.
Broadening the Scope: Ecological Degradation and Its Economic Impacts
While fossilflation and climateflation are significant drivers, ecological degradation, more broadly, also plays a role in inflationary pressures. The destruction of ecosystems, loss of biodiversity, and depletion of natural resources are increasingly leading to resource scarcities that drive up prices. For example, deforestation and overfishing reduce the availability of timber and fish stocks, respectively, leading to price increases in these and related markets (IPCC 2023). The economic impacts of such ecological degradation are far-reaching, affecting everything from raw material costs to food security, thus contributing to inflation.
Moreover, the increasing frequency of natural disasters exacerbated by ecological degradation imposes additional costs on economies, particularly in terms of reconstruction and recovery. These costs are often passed on to consumers in the form of higher prices, further fuelling inflation. Therefore, the broader ecological crisis, of which climate change is a part, is a significant factor in the current inflationary environment (IPCC 2023).
The Uneven Burden of Climateflation and Ecological Inflation
The inflationary pressures driven by ecological factors are not evenly distributed, exacerbating existing inequalities within and between countries. Climateflation disproportionately affects low-income households and countries, heightening intra-country and inter-country inequalities. Within countries, low-income households spend a larger share of their income on necessities like food and energy, making them more vulnerable to price increases in these areas (Charalampakis et al. 2022).
In the Eurozone, for example, the poorest quintile of the population spends a higher proportion of their income on food and energy compared to the wealthiest quintile, making them more susceptible to the impacts of fossilflation and climateflation (Charalampakis et al. 2022).
Inter-country inequality is also a significant concern, as the countries most affected by climate change often have the least resources to adapt. Low-income countries, particularly in the Global South, face greater inflationary pressures from climate change due to their reliance on agriculture and their limited capacity to mitigate the effects of extreme weather events (Kotz et al. 2023). This uneven burden underscores the need for a more equitable approach to addressing the global challenges posed by climateflation and broader ecological degradation.
Policy Implications: Greening Monetary and Fiscal Policies
The recognition of inflation as an ecological phenomenon has profound implications for monetary and fiscal policy. Traditional approaches to controlling inflation, such as raising interest rates, may be counterproductive in the context of climateflation and fossilflation. Higher interest rates can stifle investment in green technologies and increase the cost of capital, particularly in low-income countries where the cost of borrowing is already high (Pereira da Silva et al. 2022).
In order to address the ecological drivers of inflation, central banks and governments need to adopt more holistic and coordinated approaches, which include incorporating environmental considerations into monetary policy frameworks and expanding the toolkit of macroeconomic policies to support the green transition. For instance, central banks could adjust their collateral frameworks and asset purchase programmes to favour green investments, thereby promoting the decarbonisation of the economy (Dafermos et al. 2022). Additionally, fiscal policies should focus on targeted investments in renewable energy and sustainable agriculture to reduce the economy’s reliance on fossil fuels and enhance resilience to climate shocks (Jackson et al. 2022).
International Monetary Coordination
Given the global nature of climateflation, there is also a need for greater international monetary coordination. Low-income countries are often the most vulnerable to climate change and require support from the international community to finance their green transitions, which could involve increasing the allocation of Special Drawing Rights (SDRs) by the International Monetary Fund (IMF), expanding concessional lending, and enhancing the role of multilateral development banks in supporting green projects (Oberholzer, 2023). By fostering a more cooperative and supportive international financial system, the global community can help mitigate the inflationary impacts of climate change and promote a just transition.
Conclusion
Inflation as an ecological phenomenon represents a new paradigm in macroeconomic policy. As governments and all corporations grapple with the twin challenges of climate change and economic instability, it is increasingly evident that traditional approaches to inflation control are insufficient. Addressing the ecological drivers of inflation requires a comprehensive and coordinated response that integrates environmental considerations into monetary and fiscal policies. Doing so can stabilise prices and pave the way for a more sustainable and equitable global economy.
References
Barmes D and Schröder Bosch J (2024) Inflation as an Ecological Phenomenon. Positive Money EU.
Charalampakis E, Fagandini B, Henkel L and Osbat C (2022) ‘The impact of the recent rise in inflation on low-income households’, European Central Bank Economic Bulletin, (July), available at: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/html/ecb.ebbox202207_04~a89ec1a6fe.en.html (Accessed: 19 August 2024).
Dafermos Y, Gabor D, Nikolaidi M and van Lerven F (2022) ‘Greening Collateral Frameworks’, INSPIRE Green Finance, available at: https://inspiregreenfinance.org/publications/greening-collateral-frameworks/ (Accessed: 19 August 2024).
IPCC (2023) Synthesis Report of the IPCC Sixth Assessment Report. Available at: https://www.ipcc.ch/ar6-syr/ (Accessed: 19 August 2024).
Jackson T, Monnet E and Van’t Klooster J (2022) ‘Beyond the Debt Controversy: Re-framing fiscal and monetary policy for a post-pandemic era’, CUSP, available at: https://cusp.ac.uk/themes/aetw/beyond-the-debt-controversy/(Accessed: 19 August 2024).
Kotz M, Straubhaar J & Kalkuhl M (2023) ‘The impact of global warming on inflation: averages, seasonality and extremes’, Environmental Research Letters, 18(1), pp. 1-12. Available at: https://doi.org/10.1088/1748-9326/aca0ff(Accessed: 19 August 2024).
Oberholzer B (2023) ‘Green Growth and the Balance-of-payments Constraint’, Development and Change, 54(2), pp. 213-231. Available at: https://doi.org/10.1111/dech.12783 (Accessed: 19 August 2024).
Pereira da Silva L, Pereira J and Furceri D (2022) ‘Inequality hysteresis and the effectiveness of macroeconomic stabilisation policies’, BIS Working Papers, 50(1), pp. 1-30. Available at: https://www.bis.org/publ/othp50.pdf (Accessed: 19 August 2024).