Tackling Fossilflation

This report from Positive Money US provides a series of recommendations for the US government to address what it calls “fossilflation”, the “powerful direct and indirect role of the fossil fuel industry and its externalities in driving inflationary pressures”. The author, City University New York lecturer Andrés Bernal, argues that the Federal Reserve’s current efforts to bring down inflation through changing interest rates are “destructive”, “blunt”, and “ineffective”. Instead, he proposes instead that inflation be addressed through “qualitative and quantitative credit regulation”.

The report reaffirms arguments made elsewhere that a transition to green energy production and a just transition can address high inflation.

Bernal writes that his goals for the report are to expose myths about conventional inflation analysis and to demonstrate that there are effective alternatives for policymakers that can improve quality of life for the vast majority of communities.

Bernal explains that the current political and policy context around climate change and inflation in the US is one in which the country remains far from the changes necessary to meet the Paris Agreement’s 1.5°C goal, while at the same time households are facing high inflation rates. He argues that the fossil fuel industry has had a driving role in creating a system in which prices are vulnerable to shocks, entrenching inequality, and obstructing a green transition.

In addition to causing inflation, the report argues that fossilflation has had significant social and environmental consequences, including excessive wealth accumulation, erosion of democracy, and harms to society and the environment.

The report reviews high inflation of the 1970s, concluding that it was “a clear case of fossilflation” stemming from the Opec oil embargo in 1973 and that although the “Volcker shock” of the early 1980s receives credit, what really brought down inflation was the supply-side policies of President Jimmy Carter in 1978. In Bernal’s eyes, what the high interest rates, austerity and “sound money” ideology actually did was to serve as a political tool to legitimise social deprivation through the historic weakening of wages and unions, and to use unemployment as a disciplinary mechanism which has naturalised poverty and underinvestment.

Bernal argues that interest rate hikes are an inappropriate inflation mitigation and response policy today, and that it is a mistake to place the entire responsibility for price stability on the Fed. He explains that the current monetary policy framework “posits false antagonisms between good jobs and the environment and between a basic guaranteed level of dignity and stable prices”.

Accordingly, he proposes an alternative inflation toolkit. This includes a new green industrial policy, given renewable energy’s higher level of cost effectiveness and resilience to price volatility and geopolitical conflict. Other policy tools include negotiating prescription drug prices, targeted policies that discourage monopolistic price gouging, and rethought federal budgets based on inflation constraints.