Inflation and Climate Change

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    Stockholm (NordSIP) – Analysts have warned against the risk of inflation since central banks engaged in large quantitative easing exercises in the aftermath of the 2007-09 financial crisis. Since such fear did not materialise during the last decade, the concerns waned until central banks once again expanded their balance sheets again in an attempt to mitigate the economic effects of COVID-19 during 2020-22.

    Ultimately, it wasn’t a demand-led monetary expansion that caused inflation but rather the supply-side shock caused by the transmission of the effects of the war in Ukraine to energy markets which caused a surge in inflation. During February 2023, inflation was measured in Sweden at 12%, in Denmark at 7.6%, in Finland at 8.8%, in Norway at 6.3%, in the USA at 6% and in the Euro Area to 8.6%.

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    Climate change remains a seldom-explored aspect of the dynamics of price changes. As investors, producers and consumers seek to adopt more sustainable climate change mitigating practices and adjust to the energy transition, the changes to their investment, producing and consuming decisions can’t avoid but impact the wider economy.

    In her aptly titled “A new age of energy inflation: climateflation, fossilflation and greenflation” speech, Member of the Executive Board of the ECB Isabel Schnabel lists the three sources of inflation that are related to climate change, directly and indirectly. However, she is not the sole source of information on this topic.

    To better understand how global warming and the energy transtion may be affecting inflation requires a more in-depth review of this complex issue. Starting this week and for the coming weeks, NordSIP will provide an overview of each of these topics:

    Image courtesy of Terry McGraw from Pixabay
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    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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