We are excited to share our latest policy report, co-authored with Grantham Research Institute: ‘Inflation as an ecological phenomenon’. The report shows clearly how the planet’s worsening environmental situation and a reliance on fossil fuels both contribute to rising prices. 

So-called ‘fossilflation’ and ‘climateflation’ are also shown to have a more significant impact on the lives of low-income households and countries. But what do these two words mean?

The global economy has long been known to be highly vulnerable to volatile changes in the price of fossil fuels, on which production depends heavily. This is exactly what fossilflation describes: energy prices skyrocketing because the cost of fossil fuels fluctuates dramatically. This was felt most recently after Russia’s invasion of Ukraine caused a shock to the supply of oil. 

Climateflation is defined as the significant rise in prices triggered by the impact of climate change, as extreme weather events. The most classic and typical example is the increase in food prices, where we see prices go up due to fewer goods being produced as a result of a reduction in agricultural activity and damage to crop yields.  

The report states that in the immediate future, to avoid persistent environment-related macroeconomic instability, central banks must acknowledge the existence of fossilflation and climateflation, and adapt their policymaking accordingly.

There needs to be a move towards a sustainable economy, as well as new approaches in the monetary policies of central banks. Why? The reason is simple: climate change is also modifying our economy! As environmental problems like extreme weather and pollution get worse, they’re going to make prices more unstable.

Traditional ways of managing interest rates don’t really help with this instability, and show an incapacity to tackle the climate crisis with old solutions.

Raising interest rates doesn’t address the root causes of higher food and energy prices, like droughts or hurricanes.

Instead, it makes it even harder for companies to invest in renewables.

Dual interest rates – where a favourable rate is offered to investors in green projects – are one way in which the report suggests central banks could factor environmental considerations into their policymaking. 

Such a policy, and one that we have been advocating for years, was recently endorsed by French president Emmanuel Macron.

Environmental disruptions are set to have a greater impact on causing unpredictable price changes. This underlines the importance of key financial institutions, like central banks, stepping in and playing their part in changing the game. 

Read the full report here


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