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Climate Change and Inflation- Are they linked?

Climate Change and Inflation- Are they linked?

September 19, 2022
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We’ve been in a low inflation environment for decades now. Many investors have either forgotten what it’s like to be in this state, or weren’t even alive to experience it! Our last high-inflationary period was back in 1965 to 1982, now coined The Great Inflation.1  But unlike the past, this time inflation won’t be tamed solely by monetary policy. That’s because data shows inflation is highly linked to climate change, which means it might be here to stay.

One of the commodities with the most inflated pricing right now is energy. I won’t pretend the price increase is entirely from climate change as recent geopolitics are hugely influencing the recent spike. But, there is reason to believe that climate change is also a factor, and it’s not likely to go away. Higher carbon taxes on conventional fossil fuels will add to costs and that cost will increase as carbon taxes become more prevalent across different industries and geographies.

The increase in energy cost then transfers into the cost of food. According to Save on Energy, in 2021 food production accounted for 21% of the US’s fossil-fuel consumption.2 Just think of all the fossil-fuel inputs used in farming: fertilizer for the soil, machines to plant the crop, machines to harvest the crop, and machines to transport the final product. The industry as a whole is very reliant on gasoline and diesel fuel. According to Alberto Cavallo of the Harvard Business School, inflation on food in US and Eurozone is at 8.8%, higher in Latin America and Emerging Asia at 20% and even higher in sub-Saharan Africa at 40%.3

But there is more to the rising cost of food than just the energy inputs. The Sixth Assessment Report, published by the IPCC WGII in October 2021 reports that global warming is affecting both land and ocean-based agricultural productivity.4 Crop yields are lessening due to impoverished soils. Rising temperatures are requiring crops to be watered more frequently and the extreme heat can be damaging to the plant. Rising temps are also affecting both the farmers and the farm animals leading to lower dairy production and higher animal mortality rates (affecting meat production).

Droughts and floods are more frequent than ever reducing availability of usable farmland. In order for the land to continue to be farmed new infrastructure must be made and expensive improvements are required on the farm machinery. The variable weather extremes make for unsafe working conditions for the farmers and complicates harvests- both leading to lower production yields. All the while, insurance agencies are increasing the cost of insurance policies and banks are making financing harder. Insurance claims on crop insurance policies has more than tripled over the past 25 years with more than 60% of the cost attributed to climate change.6

All of these front-end additional costs are built-in to the consumer’s food cost. That, paired with the basic principles of Economics, says prices will increase due to the lower supply of high demand goods. Unfortunately we’re now at a point where we’re in a self-perpetuating cycle. Climate change causes higher temperatures and either more/less water for food growth, yet the more challenges climate change brings to the agricultural environment the more machinery and toxic chemicals need to be used to override the effects. An example of this can be seen when exporting corn and soybeans. When exported to places like Argentina, Brazil, and Paraguay the goods arrive on barges sent along riverways. These rivers are at such low water levels that the barges are forced to reduce their load to avoid grounding.5 That means it takes more trips to deliver the same sized load, creating even more pollution along the way.

Now that we’re at this crisis point it’s fair to say we may never be able to go back to where we were. But what we can do is act differently. We can grow our own food, be greener with our day-to-day lifestyle, and make conscious choices of where we put our money. And not just where we spend our money, but also how we invest. The investment world offers a way to promote carbon neutrality and sustainable business practices, reward businesses that are careful and diligent in making the world a better and safer place, and energy companies focused on creating clean energy. It’s one of our specialties here at Equanimity Wealth Planning and Investing so if you’re curious and want to see how you can get involved we hope you’ll give us a call.

 

1 Bryan, Michael, Federal Reserve Bank of Atlanta. The Great Inflation. FederalReserveHistory.org. 9 September 2022.

2Save on Energy Team. American Food Production Requires More Energy Than You’d Think. 16 June 2022. https://www.saveonenergy.com/resources/food-production-requires-energy/

3 Cavallo, Alberto. Food Inflation in the US and Abroad. www.Econofact.org/food-inflation-in-the-u-s-and-abroad. 1 August 2022.

4 IPCC Report. https://www.ipcc.ch/report/ar6/wg1/.

5 Mortimer, Roger. Climate Change is a Growing and Persistent Driver of Inflation. www.Kraneshares.com/climate-change-is-a-growing-and-persistent-driver-of-inflation. 8 September 2022.

6 Brooker, Jena. Extreme Weather is Destroying More Crops. Taxpayers Are Footing the Bill. https://grist.org/agriculture/extreme-weather-is-destroying-more-crops-taxpayers-are-footing-the-bill. 28 January 2022.

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