Climate threatens price stability, says Fed vice chair

December 1, 2022|Written by Graham Caswell|Bank of International Settlements, European Central Bank, Federal Reserve

Supply shocks associated with climate change could contribute to price instability, Federal Reserve vice chair Lael Brainard has told the Bank for International Settlements’ annual conference. In a speech exploring monetary policy lessons from the pandemic and the war in Ukraine, Brainard said that global heating, together with changing demographics and deglobalisation, could “herald a shift to an environment characterised by more volatile inflation”.

“The potential for more frequent and severe climate events, as we are already seeing, and for frictions in the energy transition could lead to greater volatility of supply,” Brainard said. “Together, a combination of forces – the deglobalisation of supply chains, the higher frequency and severity of climate disruptions, and demographic shifts – could lead to a period of lower supply elasticity and greater inflation volatility.”

Brainard’s remarks follow a similar warning earlier this month from Christine Lagarde, president of the European Central Bank (ECB). “If we do not account for the impact of climate change on our economy, we risk missing a crucial part of the overall picture,” Lagarde said in a blog post published by the ECB to coincide with Cop27. “Our job of preserving price stability must include further work on better understanding how climate change affects our role.”

Worldwide droughts associated with climate change have contributed to rising food and energy prices over the past year, exacerbating the fossil fuel inflation caused by the war in Ukraine. Recent analysis has found that higher temperatures over recent decades have played a “non-negligible role” in driving price developments and that climate damage could cost the US nearly 900,000 jobs each year in the absence of effective emissions reduction.

Both price stability and maximum employment are part of the Fed’s dual mandate as specified in the Federal Reserve Act.

A member of the Fed’s board of governors since 2014, Brainard was confirmed as vice chair earlier this year. In contrast to chair Jerome Powell, she has been outspoken on climate issues, warning that global heating is expected to produce a series of economic shocks which could make conventional and historically-based economic models obsolete.

This page was last updated December 1, 2022

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