Economic policymaking needs to adapt to the climate emergency | Heather Stewart

The heat wave that seized a large part of the United Kingdom this week was the last stifling reminder that the climate emergency already makes daily life more volatile.

Many places the most brutally exposed to out -of -race weather and natural disasters are in the world of world and rightly demand the solidarity of richer countries responsible for most historical programs. But emergency costs are felt everywhere.

Only three nuggets of the last week: first, chocolate prices in the United Kingdom increased at a record annual rate of 18% last month, according to The Office for National Statistics (ONS), driven by repeated weather chess from the Cocoa harvest in West Africa.

Second, Bloomberg Intelligence research has calculated that an extraordinary 1 TN was spent in the United States last year on reconstruction and recovery after climatic disasters such as forest fires and floods.

The analysis has highlighted the advantages for companies specializing in repair and resilience (DIY Chain Home Depot obtains a mention, for example, just like the cement manufacturer Heidelberg), but rightly stressed that these are resources that must be diverted from other purposes.

“Climate -related disasters redistribute billions of dollars in global spending far from the wider economy to pay the costs of repairing the last fire, floods and storms and preparing for the next one,” as the authors said.

And thirdly, a deeply depressing article by American academics, for the Iza Institute of Labor Economics, was underlined by Ruth Curtice of the Foundation Resolution. He has shown that forest fires, which are becoming more and more widespread, have a direct impact on jobs and income because smoke affects people’s health several kilometers from the center of fire.

Researchers have found that the impact over a generally smoky year strikes up to 2%, or 125 billion dollars, over the total benefit of American workers – older employees feeling the worst effects. It is also a health crisis and an economic challenge.

Even in rich countries, in other words, climate emergency absorbs a constant expansion of resources and causes repeated cost shocks.

For political decision -makers contemplating this “age of work and breaks”, as Christine Lagarde called it, another fascinating research published last week – not specifically on the climate, but on cost shocks more generally – has provided a worrying context.

Isabella Weber and her colleagues analyzed transcriptions of more than 100,000 “profits calls” – the crucial meetings to which companies update their investors – of nearly 5,000 American companies between 2007 and 2022, and overlapped them against cost data through the economy.

They found that during cost shocks – when everyone knows that costs are increasing – companies feel embraced to increase prices and build their beneficiary margins.

Examination of the language used on calls, Weber and Al suggest that executives tend to calculate that they will not lose market share, because rival companies will also increase prices and assume that the public will be more understanding than during normal periods.

It is not that the CEOs put their heads and prepare a top secret plan to make bumper benefits in the teeth of a crisis – instead, a cost shock at the economy scale acts as what the authors call an “implicit coordination mechanism”.

This is what Weber and Co call “the inflation of sellers” – not by the requirements of workers for higher wages, which companies then transmit to consumers, but by an opportunistic behavior of the bosses.

They do not argue that it is necessarily the main engine of inflation during crises such as the cocovious pandemic, but that this channel of “increase in increase” is significant – and makes the inflation of management more complex.

“If, faced with the main shocks of the offer, companies do not absorb cost increases but rather perceive them as good news – because they facilitate price increases and therefore higher profits – this has important implications for the stability of prices in an emergency world that overlaps,” they predict.

Climate change is one of these emergencies – in addition to the booming world conflicts and the dismantling of long -standing commercial relations. And as it strikes food production in particular, it seems likely to continue to present to political decision -makers cost shocks.

The main weapon of central banks – the increase in interest rates – is very frank against this species of particular inflation.

Weber pleads instead for an “approach to the toolbox” which includes the construction of “buffer stocks” of essential products (chocolate, unfortunately, seems to be unlikely to qualify), repressing companies taking advantage of economic shocks and in extremis, price controls.

Another recent plea for political decision -makers can think differently about climate -oriented inflation come from a pair of researchers from the LSE Grantham Research Institute.

David Barmes and Luiz Awazu Pereira da Silva defend “targeting adaptive inflation”, in what they call a “warm and volatile world”.

They argue that, given the probability of increasingly frequent climate cost shocks, political decision -makers would be wise to tolerate, or to “browse”, these short -term bulps more readily than they do.

They suggest that politicians may also want to allow central banks to temporarily target a higher inflation rate during repeated shock periods, and perhaps also allow more latitude around the target.

Keeping high rates to crush climate-oriented inflation has no impact on the underlying problem, Barmes and Pereira Da Silva support and increase the government’s loan costs, as well as public investment in the Green Transition is urgently necessary.

Anyone who sweated during the weekend in a house built when 30C was an aberration once in a generation may have thought about how the infrastructure of Great Britain is with the changing climate. But our infrastructure for developing economic policies will also have to adapt.