What Is Greenflation?

Summary of the publication

Climate change and the energy transition will transform society. From green products and tougher environmental standards to rising sea levels, these changes are poised to reshape the economic and financial landscape as we know it. They could also lead to greenflation, an imbalance in which demand outstrips supply and drives up prices.¹

In this Economic Viewpoint, we’ll look at the causes and effects of greenflation as well as some possible solutions. What separates greenflation from other forms of inflation is that it’s primarily caused by a limited supply, notably of commodities, as well as a shift in demand composition. This complicates the task of central banks, which are ill-equipped to combat this type of inflation. But governments have more power to ease price pressures. That means sound public and monetary policy can greatly mitigate the risks associated with climate change and decarbonization.