FMM Working Paper

: Inflation in the Anthropocene: a long-run model of growth, climate damage and conflict inflation

Human impact on the climate-system is leading to a world which is experiencing intensified extreme weather events, extreme heat, droughts, floods, storms, sea-level rise and changing weather patterns. The combined effects of these shocks negatively impact a broad range of factors in human life, from wellbeing and health, to agriculture, to power generation, to industry, to logistics. These changes have clear macroeconomic significance. Integrating empirical evidence and Earth-science based insights on climate damage and supply chain disruption with frameworks stemming from Ecological macroeconomics and Conflict-Inflation Theory, this paper showcases how inflationary pressures are a consequence of climate destabilisation. The analytical model proposed is an Ecological conflict-inflation model based on a Classical Keynesian model of economic growth. It showcases how climate-induced disruption to the prices of systematically significant inputs, capital destruction and depreciation, labor productivity losses, or labour market shocks trigger inflation and thus distributional conflicts between different classes. Simulated shocks showcase persistent inflationary pressures. The brunt of these climate shocks are absorbed in general by classes with less structural power. The preponderance of supply-side dynamics in the determination of inflation in the Anthropocene also means that price stabilisation measures will have to go beyond just monetary policy

Keywords: climate damage, climate shocks, conflict-inflation-theory