We must allow more inflation to tackle climate change – Can you accept that?

Essays by Eric Worrall

Australian financial journalist Alan Kohler has suggested that allowing for more inflation could protect jobs from rising energy prices. But he seems to ignore the economic damage that inflation itself will cause.

Alan Kohler: In a warming world, inflation targets need to go up

Alan Kohler
6:00 am, December 5, 2022 Update: 8:56 a.m., December 5

Central banks need to start thinking seriously about raising inflation targets because of climate change.

Global warming is inherently the cause of inflation, so when countries set an official target of 2% inflation to reduce inflation to 3%, will they cause a global recession in 1 year? % in the end, when it’s not caused by redundancy? demand but due to climate change?

We’re talking about the US, Europe, Japan, the UK, Norway, Sweden, Switzerland, and South Korea, all of which have 2% targets.

…

The most immediate and obvious problem is energy prices. While the marginal cost of renewables is zero, meaning it tends to be deflationary, the transition from fossil fuels will take at least several decades, especially in some parts of the world. world, and meanwhile, the scale of production is decreasing. coal and gas will drive their prices up.

This year’s spike in inflation is mainly due to Russia’s invasion of Ukraine and appears to be temporary, but when the world finally gets serious about tackling climate change, a higher carbon tax will increases the price of fossil fuel energy before it stops being used, and importantly.

That’s the whole point of a carbon tax – to make fossil fuel power more expensive.

…

If anything happens, higher food and energy prices will destroy their own demand, so central banks will be forced to cut rates, not raise rates, to maintain jobs. (this is actually in their charter, unlike climate change).

…

Read more: https://thenewdaily.com.au/finance/2022/12/05/inflation-climate-alan-kohler/

The Ukraine shock was only severe because there were not enough alternative supplies to offset disruptions to Russian oil and gas supplies. More investment in domestic fossil fuel sources could have fixed this – but that investment did not happen due to European and Western regulatory animosity over fossil fuels. .

What about Alan’s suggestion that we protect jobs by allowing higher inflation?

I disagree with Alan Kohler’s assertion that allowing higher inflation will protect people’s jobs. Inflation is destroying people’s ability to spend, and businesses’ ability to invest and hire people, as well as raising interest rates.

What is the difference between someone being unable to pay off their mortgage because of rising interest rates versus someone being unable to pay off their mortgage because inflation has increased utility bills and food costs? How can a business struggling to pay utility bills in any way be in a better position than a business struggling to pay off debt? Either way, normal people are lost.

Inflation is worse than high interest rates. Inflation creates false incentives that can completely destroy an economy, such as encouraging investment in inefficient assets like housing, instead of in productive assets like businesses. . This leads to widespread economic damage, the stagnation of productive economic sectors such as manufacturing, and the creation of huge asset bubbles, which, when burst, cause large-scale property destruction. .

Of course, low interest rates and low inflation are better than the painful stabilization of high interest rates, or the economic ruin caused by high inflation.

Lowering energy costs is the path to low inflation and low interest rates. It’s not just me saying that energy prices are key. Reserve Bank of Australia Governor Philip Lowe said last week, “…One way to tackle inflation caused by a supply-side shock is to address supply…”although it must be admitted that Lowe has been careful around devising a regulation on how the government should lower interest rates.

The only short-term salvation for people struggling to hang on to their homes, or businesses struggling with energy bills, is to quickly address the underlying issue, energy costs. And The only way to address energy costs in a sustainable way in the short term is to unleash investment in fossil fuels.by abandoning Net Zero and deregulating massive investments in energy sources.