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Greenflation? What is inflation anyway?

The average global carbon price today “is around three dollars a tonne”. 

However, the Network for Greening the Financial System, a group of central banks, recently suggested that “a carbon price of around $160/tonne would be needed by the end of the decade to incentivise a transition towards net zero by 2050”, 

while the IMF suggests it should be $75 a tonne. 

“We don’t have models which understand [the implications] of this 

Gillian Tett FT 30 October 2021

Inflation concerns intensify as cost of energy soars
Rising natural gas prices have helped push eurozone inflation to 13-year high

FT 1 Octoner 2021

Comment by Englund:

We get inflation when the economy is overheating (like the world, ha ha ha) and the central banks should therefore put interests up to cool it down.

But is it really inflation when e.g. energy prices is going up? The effect is that the consumer have less money to spend on other things which is deflationary. 

If the central banks hike interest rates in this case things would be worse.

Am I brilliant, re-inventing the wheel or ignorant?


I am re-inventing the wheel.

The orthodox economic view is that central banks should do nothing to offset inflation caused directly by a supply shock, such as this week’s rise in oil prices to a seven-year high. 

The central problem is that monetary policy typically works by raising or lowering economic demand. If spending is growing too fast and generating inflation, higher interest rates dampen the willingness of companies and households to consume or invest by increasing the cost of borrowing.

The same is not true when prices are rising because supply chains have broken, energy prices are increasing or there are labour shortages. In such cases, monetary policy is ill-suited to dealing with the shock.

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