John Locher/AP Photo
A home with a swimming pool abuts the desert on the edge of the Las Vegas Valley, July 20, 2022, in Henderson, Nevada.
Economists need to fundamentally change the way they comprehend inflation. The reason is climate change. Many items in the household budget, like food, that have been relatively cheap, will become more expensive.
This has nothing to do with supply and demand in the usual sense, and everything to do with the ravages of climate disruption. In discussing inflation and calling for higher interest rates at the Jackson Hole Conference last week, Fed Chair Jay Powell did not say word one about the impact of climate on prices. Nor did the usual chorus of inflation hawks in the economics profession.
Exhibit A is the American West, which is in a deepening water catastrophe. Likewise much of the Third World.
It is only a matter of time before factory farms in irrigated semi-deserts such as California’s Imperial Valley, which provide much of the nation’s cheap food, cease to be viable. They have underpriced traditional family farms serving regional markets such as New England, driving many out of business.
A kind of silver lining is that sustainable farm-to-table agriculture on a regional basis may get a renaissance. But as anyone who loyally buys such food can attest, it is far more expensive than the factory food available in supermarkets.
It would also be good for the environment to shut down disgusting and polluting mass-production hog, chicken, and beef operations. But that, too, will raise prices.
Demand for food, as economists say, is inelastic. When prices go up, people don’t stop eating; they just pay more. Creating a recession doesn’t lower food prices.
Food is only part of the story of climate costs. What will it cost to write off and replace, say, Norfolk or Miami? Or to truck in drinking water to much of the Southwest?
The Office of Management and Budget estimates the cost of climate damage at about $2 trillion a year. Even without the more forward-looking climate investments of the Inflation Reduction Act, the cost of dealing with floods, fires, storms, and other weather events keeps rising.
Many long-overdue, environmentally sound investments will eventually reduce costs to consumers. Electric cars will be cheaper and more reliable than ones powered by gasoline. An all-renewable power grid will eventually be cheaper and more sustainable than one powered by oil, gas, or coal. But in the meantime, there are transition costs.
Our fossil fuel economy has been borrowing from the future, enjoying low prices that fail to factor in true costs. Now that bill has come due, and it will not be cheap. To understand this shift as “inflation” in the usual sense is to be willfully blind—even more than so much of standard economics.
