Publications

Key findings from the 49th OeNB Economics Conference and the 35th SUERF Colloquium (May 23/24, 2022)

After several years of persistently below-target inflation rates, global inflation has been increasing sharply since 2021. Several driving factors have been identified: (i) the vigorous post-pandemic economic recovery; (ii) disruptions in global value chains for intermediate and final goods, due in part to short-term pandemic-related factors and in part to a possible reversal of globalization; (iii) cycles in commodity and energy production and prices, some of which may also be related to actual or anticipated climate protection measures; and (iv) labor market shortages resulting from pandemic-induced structural changes in labor demand and supply. Whether the rising inflation rates are temporary or more permanent has been subject of lively debates. Among other things, the answer hinges on the reaction of expectations and wages to the rise in headline inflation. Central banks worldwide have come under pressure to tighten their policy rates. The risk of missing a timely response and of inflation becoming entrenched, as a result, contrasts with concerns of strangling the post-pandemic economic recovery amid the fallout from the war in Ukraine and Western sanctions against Russia. At a political economy level, the interplay between monetary policy, fiscal policies and financial stability has become more complicated, with high debt, high asset market valuations and climate challenges potentially hampering central banks’ perceived anti-inflationary resolve.

Tackling the climate crisis is one of the biggest challenges of our times with major repercussions for the macroeconomy. This study focuses on the impact of setting a price for carbon on consumer price inflation. Carbon pricing is a cost-effective means to reduce greenhouse gas emissions and incentivize sustainable behavior by increasing the prices of fossil fuels. To assess the related inflationary risk, we elaborate on two complementary (explicit) pricing approaches – carbon taxation and emissions trading – in the EU and in Austria. After teething problems, the emissions trading system launched by the EU in 2005 turned into an effective tool of decarbonization, with roughly 30% of EU-wide emissions cut by 2020 as emission allowance prices were raised over time. In Austria, rising allowance prices did not have a significant impact on inflation given the high share of renewable sources in power generation. With regard to the carbon tax that Austria will apply in the course of 2022 to sectors not covered by emissions trading, we estimate HICP inflation to go up by 0.1 to 0.2 percentage points annually until 2025, excluding indirect and second-round effects. Looking forward, trends in climate change and low-carbon transition may further impact inflation, its volatility and its distributional consequence and pose a challenge for monetary and other policies alike. This, however, should not detract from necessary climate protection in view of the consequences of unmitigated climate change on inflation and human activity at large.