Report: ‘fossilflation’ driving US price instability

January 18, 2023|Written by |Federal Reserve

Fossil fuel-driven inflation, or “fossiflation”, is helping to cause the price instability facing the US. The claim comes in a new report, which says that inflation is being driven by “abrupt shortages, shifts in demand, record profits, and supply chain disruptions”. This is caused by “an economy activated, mobilised, and fed by the fossil fuel industry”, rather than a function of the money supply that can be effectively addressed by changes in interest rates.

Produced by Positive Money, the report provides a number of recommendations, including that the US should implement a green monetary policy framework that includes qualitative and quantitative credit regulations aligned with IPCC targets. It also suggests reforming federal corporate chartering with climate-calibrated capital requirements, implementing a national green lending scheme, and introducing an inter-agency council on price stability to expand the stable price mandate beyond the Federal Reserve.

“Relying on Federal Reserve interest rate tinkering to prevent and address a phenomenon as complex as price stability is a lost cause,” said the report’s author, Andrés Bernal, in a statement. “It is critical we clearly identify the relationship between a fossil fuel economy, raging inequality and environmental degradation that makes prices, and therefore the possibility of a dignified future, completely unstable.”

The report comes at a time when the Fed is increasingly determined to bring inflation down to its 2% target, even if it means contributing to a recession. Last year, chairman Jerome Powell explained that he believed average hourly earnings and the pace of job growth were too high. Powell has also argued that “it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals”.

Whereas the European Central Bank and Bank of England have mandates to support the economic policies of the European Union and UK government, the Fed does not. However, price stability and maximum employment are within the Fed’s mandate, and US policy advocates have argued that the Fed may address climate-related issues within its monetary policy framework to address both issues.

In addition to addressing high inflation today, the Positive Money report explains future inflation risks can be addressed by keeping global warming at or below the Paris Agreement’s 1.5°C target. Other recent studies show that failure to adhere to that target threatens infrastructure and supply chains, food production, and worker productivity that, if they occur, will drive higher prices.

This page was last updated January 18, 2023

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