Turkey has been talking about inflation for months. Inflation, which was below 20% five months ago, exceeded 60% at the end of March. Inflation is spoken not only in us but also in many countries. Countries are experiencing the most pronounced price movements in recent years.
Many factors such as rising commodity prices, monetary expansion during the pandemic period and billions of dollars of support provided to large segments, supply chain and logistics issues, monetary policies and Soft taxes and mismanagement can be counted among the causes of the inflation boom.
The topic has many dimensions, but another dimension that has started to be discussed is the effect of climate change on inflation.
As US President Gerald Ford’s anti-inflation campaign slogan pointed out in the 1970s, “Inflation is public enemy number one.” It causes serious damage to the economy and to social life. Just as inflation is “the enemy of the people”, climate change is “enemy of the planet #1”. There is hardly anyone who does not accept that global warming is one of the most serious threats facing the earth and humanity. As awareness on this issue increases, so does the pressure to take urgent action.
Global warming and prices
Climate change will increase financial stability as well as price stability; It affects us through three main channels: physical risks, transition risks and liability risks.
Recently, in an article from the World Economic Forum, it was mentioned that experts are doing new studies on this topic. These studies show that the extreme rise in temperatures has a significant impact on the evolution of prices. According to the WEF study, climate change affects price stability through three channels.
Global warming causes devastating climatic events. The effects of these events affect certain prices, notably food prices.
– The transition to zero carbon emissions may lead to a spike in the price of carbon. This means higher prices for electricity, gas and oil.
– Rising temperatures affect economic activities and labor productivity. This reduces the potential for long-term growth.
The effects of global climate change on price stability arise from negative shocks arising from climate change, causing prices to rise by affecting economic activity. In addition, the transitory effects of global climate change can lead to inflationary pressures and slower economic activity through cost increases such as the carbon tax.
Weather events caused by global climate change negatively affect the agricultural sector; leading to higher food prices. The effect is not limited to this. Global climate change may also reduce long-term labor productivity.
The “central banks” follow the question closely
At this point, one of the notable developments is that the issue has entered the radar of central banks. Central banks’ interest in the subject stems from the fact that they are the authorities responsible for ensuring price stability; i.e. inflation. At the same time, climate change is the result of greenhouse gases from economic activities; it is a global problem. For this reason, international organizations and governments, the private sector and the public should work together for coordination, as well as the financial sector, central banks and banking authorities.
In this context, central banks have started to include climate change in their inflation assessments.
The idea that global climate change developments should be included in monetary policy strategy was first voiced by the Bank of England in 2015. The Bank of France spearheaded the implementation place of a council for the “greening” of the financial system. The European Central Bank, meanwhile, has gone further and prepared a comprehensive climate action plan. Even though an action plan has not yet been prepared to prevent climate change from affecting price stability and financial stability in Turkey, the issue has been included in the statements of the Monetary Policy Committee and the report on inflation.
For example, in the texts of the monetary policy committee, it is stated that the board has decided to support sustainable finance practices as a long-term policy, without causing a change in the main objectives of monetary policy, in order to limit climate and other environmental risks. Although not very strong, this statement was important because it was one of the first statements of the monetary policy authority on the fight against climate change.
Similarly, in last year’s latest Inflation Report, a section titled “Monetary Policy and Central Banking in the Global Climate Change Process” was included. In this section, “Global climate change affects the economy in general through its effects on economic activity, inflation and labor productivity, and the financial system through the financial risks it creates. The fact that these factors are factors affecting price stability and financial stability has necessitated that developments concerning global climate change are also monitored by central banks.