Higher Inflation, Rates Will Stick Around as Economies Go Green

than doubled in the past year. There's little sign of the market slowing down despite the prospect of not just rising interest rates, but let's face it, rising sea levels that could put these properties underwater by twenty fifty. Bloomberg opinion column list and longtime Miami resident Jonathan Levin went looking for any sign that Florida house buyers were paying any attention to the rising flood risks for these super desirable seaside properties. Stick around for is surprising on the

Beach Report. But before that, we have an exclusive interview with Isabel Schnabel, who was a member of the executive board of the European Central Bank has been more focused than most on the practical effects of climate change and how central banks and government should respond. Thank you Isabel

for doing this now. I know you don't want to talk about what's going to happen to interest rates next week or next month, and some of our listeners will be disappointed to hear that, but I suspect many will be delighted that we're we're lifting our heads up from that to to longer term issues, and there's no bigger

one than climate change. So before we get into the economics of this, I just wanted to start by asking you why you, as a senior figure on the e c B, seemed to have been the one who's invested most time in thinking through and giving speeches about the economic implications of climate change. So, first of all, thank you some much, Stephanie for for having me here today. It's it's such a pleasure to to be part of your very nice podcast, Serious and I'm also delighted to

talk about the topic of climate change. And as you said, I've spent quite some time thinking about this topic and thinking about what it implies for central banks and monetary policy. Maybe it's not fair to say that that I'm the main person driving it. I think that it would be fair to say that it was actually President Laguard who who started to put a lot of emphasis on climate change here at the ECB. And I must say that

I actually went through a learning curve. So when I joined the e c B, I think I was a bit more skeptical regarding the role of central banks with regard to the climate change, and my my thinking has developed quite quite profoundly over time by understanding a better I mean trus of all, of course the massive impact that climate change is going to have on the economy, but also the important role that central banks may actually play.

So you gave us a speech um that I thought was particularly interesting in March of this year, where you were thinking about the impact on inflation of climate change and the sort of there's there's three different price shocks that you felt we were sort of looking at down the track and indeed already experiencing to some extent. Do you want to just quickly run through those those dynamics.

Let me, maybe a first um, make one very important point, which is that I I think it's very likely that after the green transition has been accomplished, energy prices are actually likely to be lower than they are today. So what we are talking about when we're talking about these inflationary effects is really what's going to happen during the transition.

And during the transition, it's it's quite clear that prices of carbon intensive energy sources are going to rise, and this is of course also necessary in order to accelerate the green transition. And as you rightly said, I I tried to to better understand the different types of inflation that we may experience due to the green transition in the time to come. And the first type I mentioned was what I called climate inflation. So this would be

the type of inflation caused by climate change itself. So due to climate change, there is likely to be a much higher frequency of natural disasters, so of flooding, wildfires, droughts, and this for example, will have quite some impact on food prices. And I think it's this is no longer like a distant prospect, but we are already seeing that.

And so this climate inflation is what is coming from climate change itself, and our economists looking at this have also the other part of that is it becomes more volatile. You could have just an increase in the volatility of inflation as well, from these kind of shots, that's certainly true as well. The second type, and I would say this is quantitatively the most important one, is what I

called fossil inflation. This is also what we are basically seeing at the moment, further reinforced by by the war um and fossil inflation in the end is a reflection of our excessive reliance on fossil energy sources in the past. And then finally, the third type of inflation I mentioned

was what I called green inflation. And green inflation is related to the expansion of renewable energy sources, and it's important to acknowledge that this expansion we lead to a very high demand for certain metals and and certain minerals. So good examples are lithium, copper, nickel, cobalt, which which

are also in short supply. So especially if if everybody or or or many are trying to accelerate the green transition, this recreate a huge demand for those metals and minerals and imply increases in in their prices, and this then leads to re inflation. And if you, if you're ready now look at some of those prices, this is quite striking. So I think if I remember correctly, the price of lithium has increased by a factor of ten since the

beginning of twenty twenty one. So uh and and this is I mean, at the moment, I would say most of what we're seeing is still fossil inflation. By going forward, the share of re inflation is likely to become more important. Thank you for for being so so so clear about those things. How concerned are you that people will begin, with some justice to associate the move to a zero carbon economy with the serious inflation problem. Well, there's a there is certainly a political issue there, so that that

won't make the transition easier. But we should be aware of the fact that all the research that I know shows that the that the green transition is the easier the earlier it really starts. So if we if we move too late, it can become very disruptive and too late already I mean, of course, I guess it's fair to say that that we are already moving too late.

I mean, if we if we look at the Paris goals, um, I think it's it's actually quite striking that even in the year twenty twenty so at the height of the COVID pandemic, where the global economy was partly shut down on the reduction in carbon emissions was was not enough, I mean relative to what is needed in order to achieve our goals. So basically you would need to achieve more every single year than what happened in twenty twenty. And I think this this shows us that we are

already very late. And I think I mean waiting makes everything much worse, much more costly in economic terms, and of course that is one of the major challenges um for governments to explain to the population that the economic costs are going to be much higher if we wait even longer. There's a burden that goes on central banks, and we might talk a bit about that, how should a central bank like the European Central Bank approach these various kinds of inflation that we now see coming down

the track? But is there a more sort of interventionist or certainly a more expensive role for for governments in responding to this these transitional issues. So let me be very clear on this that it's clearly governments who are in the driver's seat, so there can be no doubt about that, and their major task is to accelerate the green transition, and most economists would agree that the ideal instrument would be a carbon price, and ideally even at

a global level. In in addition, there will be the need for massive investment, public investment, but then of course also a private investment. So I think the governments have

a very important role to play here. We should also not forget that certain parts of the population are likely to suffer more from the energy price increases that that we discussed than others, and so the so governments also have the role to protect the most vulnerable parts of our society who spend a much larger share of their

income of for energy. And at the same time, all the measures have to be designed in a way that they don't destroy the incentives, because, as I said, the higher energy prices of course also needed in order to make sure that energy demand is going to decrease, that there is an incentive to innovate um to become more energy efficient in all of that, and so if governments, for example, simply subsidize energy prices, this would certainly go

in the wrong direction because this would destroy those very important price signals which are needed in order to accelerate the transition. If we are looking at potentially a need for much for more government spending on this and certainly more government investment and overall in the private and the public sector, a lot more investment and on a quite

reasonably speedy time scale um to support this transition. Is that I mean that sounds to me like an environment for higher long term interest rates compared to where we've been in the last few years. Do you think do you think that's right? Are we sort of structurally moving or at least going to have a period period m as this transition is achieved where interest rates could be significantly higher long term interest rates, not necessarily the ones

you control. Yes, So I actually share that view that we may now enter a very different macroeconomic environment from where we were. I mean, we had this, uh, this long term trend of declining interest rates, which was also related to the fact that there was an abundance of savings on the one hand and relatively sluggish investment demand.

And if we if we look at the at the massive investment that is needed, as I said, both on the public and on the private side, and this is not just the green transition, but that's that's also I mean as we know now it's for example, defense and other issues. Then I would agree that this will tend to lead to higher interest rates going forward. It seems like if you're for a big chunk of the population, you might say, Okay, my mortgage rates going up partly

because of the transition to zero carbon. My cost of my petrol and my energy has gone up. The world has just got a lot more expensive, and it's all down to these greens. Yes, So that's that's another interesting question.

So maybe before we talk about the distributional effects. I think one of the implications of what we discussed is that we need to put many more resources into investment, which applies that that that there is in the end less consumption and already that even before looking before looking at the distributional effect, already that could create a polity.

So you've added another one to the list. The high need for investment implies that that comes asumption growth is being to be a slower But I would say that, of course, climate change itself is something which creates a

lot of inequality. I mean, we know that different parts of the world are affected very differently by by climate change, and unfortunately it seems that the poorest parts of the world are affected more more strongly, and I mean even within Europe, one can see that that different parts are affected very differently. And so it's not just climate policies which kind of may have a distributional effects, but it's

also climate change itself. But on the on the climate policies, I think in order to to get uh, I mean, the agreement from the population to all these policy measures, it's absolutely crucial that that there is a certain degree of compensation. I mean there is UH. There is a debate going on for exact way it comes to carbon taxes, how how to use the proceeds from that. And given that the carbon taxes at tend to be regressive, so they affect the poorer part of the population more than

uh than then the better, the better off. It's clear that at least part is not all of those revenues should be used for compensatory measures. Again as a stress before this has to be done in a way that the incentives are not destroyed. So that is so some people say it could simply be a pre captor distribution, which then would actually benefit the poorer people more than

the than the wricher ones. So this is it's easy for a central banker to say when all of these policies would actually have to be by governments, and in the European level, you don't even have necessarily joint fiscal policy to do those things. As a central bank, and thinking about your basic remit, which is inflation and or controlling inflation, and you're looking at these various elements that could make the world more expensive over time um and

potentially also have produced more volatility and inflation. Does that I mean, how much does that change the way? Should it change the framework for policy over the next few years? Will you should you be more tolerant of of higher inflation because it's part of this transitional green challenge. Yes, So this is uh really the most important question that

we will have to answer over the coming years. So the first thing that we will have to acknowledge is that it's very likely that the nature of energy price shocks have changed. So in previous times, I mean, the standard prescription would would have been that we would look through energy price shocks because they were considered to be a temporary and in short lived. So the idea being that if we reacted to such a shock, that would

kind of normalize after a short period of time. Anyway, then we would uh possibly then weaken the economy at a time when this this this price shock has already disappeared. And therefore the standard prescrictive prescription was to look through

such energy price shocks. But now I would argue that the that the nature of these sharks has changed, that that there is a more persistent or more structural component to these energy price shocks, so that we have uh a prolonged increase in energy prices over a longer period of time. As I said, I mean over the period of the transition, which actually can be quite long, so we are not talking about five years, but we are

talking about possibly much longer period. And in such a situation, it's no longer clear that we can afford to just look through these inflationary effects, because there is the risk that inflation expectations u getting the anchor, which which threatens the credibility of the of the central bank. And when it comes to energy, this is particularly high risk because people go to the gas station, let's say, quite often they really see what's happening there, and therefore it has

quite a strong impact on their inflation expectations. And of course if there is the anchoring of inflation expectations, I mean, this can give rise to a wage price spiral. This becomes all the more likely the longer the high inflation period persists, and that then for us becomes very dangerous. And this is why I think that we actually cannot look through this persistent price increase that may happen in

the course of the green transition. There has always been an argument that said, over time they look through strategy was actually rather bad for for workers. People have to face that sort of immediate hit to their real incomes from this spike in prices and not have any kind of compensation in the form of slower, lower inflation down the track. You just end up with lower wages in real terms, and the central bank has not been battling on your behalf to to preserve your real purchasing power.

I mean that's a valid point because I mean, as I said, I mean, if energy prices, you know, go up and down, I mean they kind of averages out. But if you have this persistent increase, then what happens is precisely what you're saying, and I think it's not realistic to think that then wages were not at some

point react. I mean, of course it will react. And just you you talk about having a different approach now to to particularly the energy driven inflation, because it's likely to be more long last thing, And clearly when you look at the US, they have had inflation which was not just driven by energy and but was kind of fundamentally kind of misdiagnosed, and they are now, by their own admission, more or less having to sort of play

catch up in responding to that inflation. When you think about how are we going to respond to this environment which might have structurally higher inflation, um, do you feel you will have to be more responsive, um and have a less gradual approach to to raising interest rates over time then you might have done in the past on the basis of seeing the US experience, well, of course,

the US experience is in several respects different. I think the major difference is that the US had this very strong fiscal impulse which was much larger then what we have seen in the UR area. And um, I mean, in particular, you also see that that wage developments look already very different from what we are seeing in the UR area, where wages wage growth is still quite sluggish, and you may say surprisingly so, um, I I don't think that it's going to stay like that, So this

is certainly going to to pick up. And I think, I mean, what we can certainly learn from the US is that it's very important to react early enough, so that is that is very important. There's a lot of factors that have kept inflation and interest rates low over the last twenty years. You said you talked about this, but there was an enormous amount of savings relative to

the demand for investment globally. There was potentially the demographic factors that we're pushing down long term interest rates, which I think we know now globally certainly are going to go into reverse because we're starting to have a declining working age population. When you think of all that, do you share the view that those are now going into reverse, that we're looking at a higher interest rate environment. It's quite difficult to predict such things, but I think they're

very good arguments for what you describe. I mean, we've had this long period of disinflationary sharks, and of course one of the main factors driving that was the growing role of China in the global economy, which certainly had a disinflationary effect globally, and UM I agree that it's quite likely that some of that is going to reverse. And the war, which we haven't discussed much so far, I think it's another factor which may actually speed up

this change. I mean, what what we are seeing is that very close reliance on a particular countries UH is very dangerous. I mean energy that the energy reliance on Russia in Europe is I think a very good example, and so it's very clear that this will have profound

effects on the future design on supply chains. UM we already discussed the green transition, which will have a major impact, and UM in soul I think they are good arguments to see a fundamental change in the macro economic environment going forward, and one that becomes very much more challenging

for for central banks. Um or certainly raises raises new challenges. Finally, I guess I should ask you your you are doing UM an educational job with these speeches and this interview, thinking about the the dynamics of these shocks, and as we've as anyone paying any attention to this interview will here most of the news is not very good. It's some difficult inconvenient truths which get more and more inconvenient

by by the month. How would you rate the pol politicians and the governments of Europe in helping voters understand these difficult inconvenient truths. Do you think we've we've we're getting any better at explaining the challenges the trade els involved from at a political level. So I think that in general there is far to less focus on on

on climate change in particular. Still, I mean, if we look at how much attention was given first to the pandemic and then to to the war, which of course is entirely appropriate, one could be surprised that, not, to compare, a comparable degree of attention is given to the issue of of climate change. So I think, um, a politician so far have not been very good at conveying the

proper chense of urgency that we're actually facing. So it really seems that bad things have to happen in order to convince the politicians to become more proactive also in their communication. As we discussed, I mean, there will be some opposition to everything that is going to be needed, so it won't be easy. So communication will play a fundamental role in order to make the green transition a success, and I think much more will have to be done.

And people like Larry Summers, who we hear from a lot on this podcast and indeed the Economist magazine, who say that central bankers should get back to their knitting the English expression that should stop going on about these things that are not part of their remit. What do you say, Yeah, I find that misguided honestly, because I mean, we discuss how climate change effects inflation, so how could central banks ignore that. I think it's simply not appropriate.

Climate change has fundamental implication for our primary mandate, and so I think it's absolutely clear that that central banks have have to look at this what it implies for inflation and what it implies also for the design of our operations. You could say that by the treaties we are actually obliged to do that because we are supposed to support the general economic policies of the EU, and this certainly means if we have to make sure that whatever we do is Paris Aliant talked to us about

novel member of the executive Board of the ETV. Thank you very much, Thank you, Stephanie m Now it's no surprise maybe the politicians don't always want to face up to the inconvenient implications of timate change. But you'd think anyone spending a few million dollars on a beach front property in Florida would want to think about those implications very carefully, especially the risk of the chunk of that

property could end up part of the ocean. But it seems there's not a great appetite for inconvenient truths in Miami either. He's Bloomberg opinion columnist and former Miami Bureau chief Jonathan Levin. I hand the campions like a Miami and there are people who think that Miami over time will be covered with water, and a lot of people

worry about that. I don't know. Living here, obviously, I think that, yes, obviously that's a possibility, or technology could help prevent that from happening, because there are so many economics interested in this city. That's Realator Maria Luisa Singh of Keys Company, whose office sits on brick Okey, a man made island lined with palm trees with views of

the Glassy towers in Miami's Financial district. Like many others in South Florida, sing is optimistic the climate change won't wreak havoc on this global tourist mecca, and believes that money and human ingenuity could be enough to prevent a worst case scenario. So it's something that's on people's mind that is possible and that you have to stay on top of it. For that reason, not everyone is willing to invest in Miami because of that concern, but those

of us that are here assume the risk. Here in Miami, a supercharged real estate market is fueling soaring property values, empricing many people out of the market, and there's little evidence that the masses are eating the potentially disastrous effects of climate change, which is expected to increase major flooding fivefold. In fact, a recent study led by researchers at the US home finance giant Freddie Mac found that homes directly exposed to sea level rise in coastal Florida command no

discount at all over those that aren't. For now, many consumers here are left to wonder on their own about how wise it is to buy a home in a coastal community like this, knowing that climate change is on the horizon, and what is a reasonable price to pay. Among them is Kala Zobel, a year old who recently moved to South Florida to work with the county government. Is sort of a hazard to live in places near water and stuff, and prices in Miami are already high,

so sea levels will continue to keep rising. One key reason rising seas aren't priced into Miami's real estate is that people simply aren't aware of the risks. Technically known as information asymmetry, Florida and many of the US's most vulnerable states have few or no laws on the books

requiring sellers to share information about flood risk. The Natural Resources Defense Council puts Florida among twenty one jurisdictions with a failing grade and a recent assessment of flood risk disclosure rules here's Joel's Scotta, a water and climate attorney with the n r d C. I think a big problem with UM understanding floodisks in the United States is that there is not good transparency both at the federal informational level as well as the information that a seller

might have when it comes to disclosing potential flooderisks to HomeBuyer UM and that needs to change. Both the federal government through FEMA as well as states by changing the disclosure laws, UM should require more information to be shared about flood risks so buyers are informed and can make good decisions about where to live and out a live.

Even in the states that require flood risk disclosure, the assessment of risks is often based on backward looking metrics, such as whether home has been flooded in the past, and the warnings can be thrust upon home virus at the eleventh hour as they're signing dozens of other documents at a real estate closing. That means many people are pouring their savings into properties without necessarily understanding the risks

to their investment. As Abigail Fleming, an environmental justice lawyer and University of Miami School of Law professor, told me, it's often low income communities of color that are most susceptible. You know, knowledge is power, so knowledge of these risks is really necessary for better decision making UM. But I think these that information needs to be coupled with actions obviously to disclose and communicate flood risks, but also those

must be supplemented with resources and options for adaptation measures. Fortunately, some advocates are stepping up to make people more aware of their risks they're taking on when buying property along Florida's coasts. The real estate marketplaces Realtor, dot Com and red fin have teamed up with nonprofit First Street Foundation to provide flood risk ratings for properties on their websites, and First Streets founder Matthew Abby said he would like

to extend the resource to more government entities. Meanwhile, Hawaii just became the first state to require sea rise disclosures and housing transactions. Effect of all may one. Still, the US has a long way to go before consumers aren't left in the dark. The Freddy Max study did find that homes that are already in designated flood plans command some discount, but that doesn't mean the price against sea level rise. Here's study author and Freddy Max and your

economists a gitatrea to explain. We find that homes directly exposed to projected sea level command no discount over those that aren't exposed. There were discounts for homes in female designated flood plans, but that's probably to upset the cost of flood insurance buyers must carry if the mortgage is financed with a government back lender rather than future sea liberal rzed risk considerations, and these findings hold true for primary residences as well as for non honor occupied properties

that are mostly investment properties. Federal flood maps are still based on backward looking metrics and failed to reflect the threat of future sea level rise. Also, many other properties that aren't officially in floodplanes are nevertheless vulnerable to the

ships expected to take place in the coming decades. Not surprisingly, politicians and their constituents often fight floodplane designations out of concern they will depress the value of properties in their area, But experts say vulnerable states and municipalities should instead take the long view, give people accurate information about their flood risk so communities can take decisive action. Here's Obel, the

new South Florida resident. I think a lot of people just don't know, or they don't think that far into the future, or you know, some people I don't believe it's happening. You know. Well, that's it for this episode of Stephanomics. We'll be back next week. In the meantime, if you like the show, please rate it and check out the Bloomberg News website for more economic news and views on the global economy. You can also follow at

Economics on Twitter. This episode was produced by Mendis Hendrickson with support from Summer Sadi, Special thanks to dr Isabel Schnabel and Jonathan Levin. Mike Sasso is executive producer of Stephonomics and the head of Bloomberg podcast is Francesco Levi.