Here’s another thing keeping prices high: Climate change
The pandemic economy is one of imbalances: supply chain woes and rising inflation have been with us for a while now, with few solutions in sight. But theres another big shock to the global economy taking shape: climate change. Although the pandemic will eventually end whether it takes months or years climate change is here to stay. More severe weather events and shifting climate patterns will continue to create problems for people and businesses around the world. And the already battered global supply chains will be on the front lines. Thats bad news for the rampant pandemic-era inflation that Americans have had to get used to during Covid. Think unseasonably cold winters or hotter-than-normal summers increasing energy costs and prices for products like fans, AC units and generators. Meanwhile, fires, droughts, floods and storms can affect the food supply chain and drive prices up. And any extreme weather event can lead to property damages that then affect material and construction costs. Of course these factors are not the only drivers of higher prices. With energy, for example, geopolitical events still play an even bigger role. Nevertheless, the impact from climate change is real, too. Businesses and lawmakers are looking for ways to mitigate the fallout from a shifting climate in real time. Last years big freeze in Texas, more active hurricane seasons and record floods are a reality for many Americans. Climate change is no longer an abstract concept. But thinking about it from the perspective of economic risk rather than pure politics changes the tone: Climate is essentially an economic problem and its about how we manage the risk, Dr. Sanjay Patnaik, director of the Center on Regulation and Markets at The Brookings Institution, told CNN Business. And Patnaik isnt alone in his opinion. Companies, industry groups and government agencies are all starting to pay more attention. In September 2020, the US Commodity Futures Trading Commission published a report calling climate change a major risk to the stability of the US financial system and to its ability to sustain the American economy. And last year, an IMF official said a climate crisis could ignite a financial crisis. The potential financial and economic impact including on inflation is good reason for central banks to look at climate change, Patnaik said. Last year, Federal Reserve Chairman Jerome Powell called for a coordinated response to climate change to mitigate the risks to the world economy. Managing inflation is one of the Feds two main mandates, along with keeping unemployment low. Soaring prices during the pandemic recently led the bank to change its policies. Elsewhere, central banks are already deeply involved in the climate risk challenge: Last year, the Bank of England was given a new mandate to support the UK governments goal to become a net zero economy by 2050. The pandemic has gotten Americans used to supply chain troubles. But with increasingly frequent extreme weather events, these disruptions might become more common even once Covid is a thing of the past. The days where we can get anything we want at the price we want are over in the era of climate change, said Patnaik. Climate change will raise costs of transport and logistics. I think food, agriculture, is going to change fundamentally. In fact, thats already happening. Before the pandemic took over, we were already seeing supply chain issues because of climate events, said Geoffrey Heal, professor of social enterprise at Columbia Business School. In 2011, for example, devastating floods in Thailand disrupted the supply chains for consumer electronics and auto parts, with some US car makers even halting production. More recently and while the pandemic was already raging the worst flooding in decades around Wuhan, China weighed on the US supply chain for personal protective equipment. Thats also a reminder that globalized supply chains mean companies and consumers could be affected by extreme weather anywhere in the world. Climate change administers shocks to the supply chains. Theyre one-off shocks, but they may be coming more frequently than before, Heal said, adding that with the increasing frequency of severe droughts, the food supply chain could be affected. Weve seen a bit of that with the droughts in the Midwest, he said. We could certainly see droughts in the United States, or in India, or in Russia. If inflation is running low when major climate events occur, the impact on prices might prove short-lived, Heal added. But in an already inflationary environment, like the one America is in right now, extreme weather could keep prices high for much longer.