Coal Prices and Inflation in a World of Shocks

Climate change mitigation policies face challenges in an inflationary environment. If the policy response to shock inflation is for central banks to raise interest rates and governments to adopt fiscal austerity policies, as has happened in the euro area, this carries the risk of slowing or even halting investment in decarbonisation due to the high upfront capital costs in key areas such as renewable energy. The economic uncertainty associated with an austerity response to inflation also carries political risks. It could strengthen far-right parties and thus undermine political support for climate mitigation policies.

Fighting inflation by pushing the entire economy down, even if it is triggered by sectoral price increases, does not seem to be an accurate or feasible strategy. At least not in the long run. Therefore, a new set of policy tools is needed to respond to inflation in a world of shocks and under the pressure of mitigating climate change in a more targeted way. This new approach to fighting inflation can be focused on preventing and limiting price spikes in sectors that matter for system-wide price stability. It should combine stabilization with transformation efforts for sectors of systemic importance.