Climate change doesn’t cause inflation.

A new study in Nature from two scientists and two European Central Bank officials argues that climate change could cause inflation. A Daily Caller story by Nick Pope about the study quotes me on why this is likely not true:

“Inflation is a monetary issue. It has to do with the money supply. The Earth’s average temperature does not affect the amount of currency in circulation,” Ryan Young, a senior economist for the Competitive Enterprise Institute, told the DCNF.

Pope’s whole story is worth a read. This post offers some additional thoughts about the relationship between climate change and inflation.

 While the money supply is the dominant factor in inflation, it is not the only factor. Productivity can also affect the price level.

Hold the money supply constant. If real goods and services grow by 5 percent, you get 5 percent deflation. Economic growth is deflationary. If the real economy were to shrink instead, there would be inflation. So the study’s argument, which ignores monetary policy, argues that climate change would cause the economy to shrink.

Food prices would be severely hit in their model, rising by up to 3 percent per year over the next decade. This is unlikely since a warmer climate means longer growing seasons in many parts of the world, and food has become steadily more affordable over the last century of warming. But for now we’ll assume their model is true.

Their model’s estimated range for inflation for all goods, not just food, is from 0.32 to 1.18 percent. For reference, food is 14 percent of the US Consumer Price Index, or about a seventh.  This implies that climate would either barely affect other goods or might even make them more abundant, if their model is consistent.

Again, all of this estimate comes from the productivity side of the inflation equation, and none from the monetary side.

The monetary side of inflation is far more powerful than the productivity side. Three percent real annual growth is considered rapid in most countries. Central banks, by contrast, can grow the money supply at an almost infinite rate. Argentina is currently attempting to climb down from an inflation rate of more than 200 percent. A monetary policy conference I recently attended included envelopes of worthless 200-million-bolivares bills from Venezuela in its gift bags.

If climate change does cause 1.32 percent inflation, central banks can easily counter it by adjusting their monetary policy accordingly. That is less than regular year-to-year money supply variations even in relatively stable central banks.

There is also a difference between climate change itself and climate change policies. Pope quotes me on this as well:

“Climate change policies, rather than climate change itself, do tend to increase inflation. They do this by increasing deficit spending, which central banks are more or less obligated to finance … Typical climate change policies have an additional, smaller effect on inflation by reducing productivity. Green products are often less durable and less efficient, and they take up investment dollars that could have gone to other uses.”

With US climate spending of several hundred billion dollars per year in a $26 trillion economy, this separate inflationary effect is almost certainly smaller than 1 percent per year. It is also almost certainly above zero.

Climate policy-related inflation works on both the monetary and the productivity sides of the inflation equation. Deficit spending can increase both the money supply and the velocity of money. Either or both of these cause inflation.

On the productivity side, politically-driven investments are more likely to fail than market-driven investments. We’ll never know what other uses people might have put their money to, but it almost certainly would have created more value than the larded-up bills Congress passes. Typical green products are also often less durable and less efficient than regular products. They are also often more expensive, leaving consumers with less money left over to spend on other things.

This is a double whammy for inflation. Though again, this is likely less than one percent per year, compared to nearly infinite inflationary power on the monetary side.

Does climate change cause inflation? Almost certainly not. Not only does climate have nothing to do with the money supply, longer growing seasons mean more abundant food and lower prices. Their model is almost certainly in error. And if it does cause inflation, the amount will be small enough that central banks can easily counter it. Do climate change policies cause inflation? Yes, but again, by an amount that central banks could counteract in their sleep.

Inflation is first and foremost a monetary phenomenon. It is not a climate phenomenon.