Three weeks of intense fires in California, Oregon and Washington should set the alarm bells ringing for politicians. Fire tornados offer a terrifying new dimension to the ecological threat facing the Western states. Climate change is a risk that investors can no longer afford to ignore.
The ramifications for inflation are paradoxical. Renewables are driving energy costs lower. For food, it has often been assumed that climate change will lead to higher prices. There is certainly enough evidence already of the side-effects of disruptive weather patterns on food supply.
However, it should not be assumed that more disruptive weather patterns will lead to permanently higher inflation. The story of energy deflation shows that another scenario is possible. In the case of energy, it required state intervention (notably led by China) for significant economies of scale to be realised. But in the case of food, investors are looking intently at the possibilities of moving away from land production, to more secure, lower carbon alternatives. Many of these could, if scaled up, offer big cost savings.
There are a number of important start-ups that are pushing a quiet revolution in food production, which, if successful, could help to reduce volatility in food prices.
Summary
• Climate change could push food inflation higher
• But technology could lead to secular deflation in food
• With energy costs falling too, central bank target may need to change
