European Central Bank
A new age of energy inflation: climateflation, fossilflation and greenflation
Isabel Schnabel

Inflation whether there is a war or not!

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, in which she describes the new sources of inflationary pressures related with the transition to a green economy and the change in the energy model. She focuses on the role of monetary policy in this protracted context of high inflation to protect purchasing power and promote growth and employment.

Key findings from the report:

  • Inflation levels in many countries at the highest in over 40 years, due to surging commodity prices, calling for a step change in energy policy. In 2019 oil products and natural gas still accounted for 85% of total energy use in the euro area.

  • The war in Ukraine shows us how dependence on fossil energy is not just a threat to the planet, but also it is a threat to national security and our values of freedom and democracy.

  • The transition to a green economy will come at a cost: As we build a more sustainable economy, reliant on renewables “freedom energies”, we face a new age of energy inflation with three distinct but interrelated shocks that can lead to a prolonged period of upside pressure on inflation:

Climateflation: linked to the costs of climate change itself, for example the rise on food prices due to an increase in natural disasters and severe weather events like droughts.

Fossilflation: linked to the cost of the dependency on fossil energy sources.  Fossil fuels become more expensive in any supply shock such as a real war or lower production levels. In this regard, oil and gas markets are often artificially tight, pushing up prices at the expense of energy importers, such as the euro area.

Greenflation: A more subtle pressure on inflation has to do with the companies’ investments in green technologies that require significant amounts of metals and minerals, such as copper, lithium and cobalt. Rising demand of this products versus a constrained supply leads to price rises. So far, greenflation has had much less of an impact on final consumer prices than fossilflation. 

  • Climateflation and fossilflation share many of the characteristics of an adverse supply shock while greenflation is much more likely to be the result of a strong and persistent positive demand shock, or investment boom.

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