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Inflation seems to be the financial word of the year in 2022. Rising costs for goods and services affect our personal and professional lives. Is there an end in sight in a post-pandemic, post-war-in-Ukraine world? Could the effects of climate change be a major underlying cause of inflation?
Heatflation is a term describing the increasing cost of agricultural products that are in short supply due to prolonged drought and extreme heat. As an example, India banned wheat exports for 2022 after extreme heat in the spring affected its crops. While the BBC reports that India comprises only 1 percent of the global wheat supply, its ban on wheat exports is still economically significant in a difficult year for wheat supplies (https://bbc.in/3RTQugE).
The war in Ukraine is a major disruption to the wheat supply chain. In years to come, India may not be an outlier country that decides to ban exports and keep food for its own citizens.
We will not fix the issue of heat- and drought-affected crop supplies by raising interest rates. Heatflation is a climate-related problem. In 2022, heatwaves and wildfires dropped crop yields across the world. France is battling the worst drought on record, leaving only 53 percent of the national corn crop in good or excellent condition (https://reut.rs/3BIP8zI).
The Hill ran an article in May of 2022 titled, “To fight inflation, we must fight climate change.” It writes: “Because climate change affects prices across many sectors, its impact is easy to miss. Think of a simple loaf of multigrain bread. If the bakery typically gets its wheat from a semi-arid region now undergoing a full-blown drought, finding an alternate supply will cost more. Perhaps the oats come from another region that experienced flooding, destroying half the crop. With the same number of bakers competing for half as many oats, they will inevitably bid up the price.”
The climate-related impacts are compounding, the article continues (https://bit.ly/3qJi4RP): “Much of U.S. barley production is out west, in regions prone to wildfires. If some barley burns, what remains will cost more. Even if millet is grown and harvested without incident, shortages can result if waves of powerful tornadoes destroy some of the silos where it is held. And although flax seed production might be fine, if hurricanes delay the ships bringing it to the bakery, bread output may have to be reduced for a while.”
Grains are not the only food supply suffering from warm temperatures; heat-stressed livestock struggle to gain weight and require more water. If the price of farm equipment and supplies is influenced by war or pandemic, those factors may subside when those events are over.
What quick respite can we expect from heatflation? A 2017 U.S. Climate Science special report projects that even in the best-case scenario, the projected global temperatures may not stop rising until at least 2050. The worst-case scenarios show temperatures climbing through 2100 (https://bit.ly/3dj4H7T).
How is the world responding to heatflation in 2022? Europe is struggling as it burns more coal to bolster the reduced supply of Russian gas. While Europe does have ambitious plans to cut carbon emissions 55 percent from a 1990 baseline by 2030, it does not help in 2022. The war in Ukraine made many nations scramble for a quick, dirty fuel alternative that may have disrupted larger clean energy plans, which further exacerbates heatflation (https://bloom.bg/3eYnGVO).
In the United States, the Inflation Reduction Act of 2022 provides some avenues to indirectly alleviate heatflation by targeting aspects of climate change, but it is far from enough to slam the global temperature brakes. Tax rebates for energy upgrades are useful, but they are slow avenues to change the average temperature of the planet and refill lakes and reservoirs.
In the southwestern states, Colorado River dependents are likely to feel more pain from heatflation in the near future. More than 100 years ago, the states that pulled water from the Colorado River and its tributaries formed the Colorado River Compact. Essentially, the compact divides up water shares that are no longer there.
Its situation is similar to an oversold airplane where there are more people than the capacity to serve the people; there are more allocations of acre-feet of water than there is actual water in the river system.
Reuters reports (https://reut.rs/3eXXcDN): “Arizona, Nevada and Mexico will have supplies reduced for a second straight year: 21 percent for Arizona, 8 percent for Nevada and 7 percent for Mexico. They are the first to be subject to cutbacks under the Colorado River Compact. Last year, they got hit with 18 percent, 7 percent and 5 percent reductions, respectively, for the first time ever.”
The water cuts will expedite some water conservation measures, which is great news. They also will likely speed up the bidding war for water entering desert communities in these states. Heatflation-related prices will correspond with consumer behavior. Water customers (residential, commercial, industrial and agricultural) will individually answer the question, “Do I need to cut my water usage or am I OK with paying more to avoid changing my habits?”
An average month of water usage in my home in Utah is roughly $30. Even if my water utility doubled the price of water, which is unlikely to happen, would that incentivize me to make drastic changes, or would I cut something like one trip to the movie theater out of the monthly budget? I currently don’t have much incentive to cut water use other than personal interest in the topic, being in the plumbing community.
Yet data compiled from the Utah Department of Natural Resources in April of 2022 shows that “99.39 percent of the state is experiencing severe drought or worse.” Something has to give. Utahans and neighboring states will need to figure out who is responsible for realistic water usage cuts, with or without major financial or policy implications (https://bit.ly/3qMO6wl).
If an electronic device in your house shorts out, the breaker trips, you unplug that device, reassess and then turn the flow of electricity back on at the panel. There is no potential to do this type of hard stop with water at a global level. Heatflation is a climate-change-based problem that we will suffer through until we can implement enough changes to allow rivers and reservoirs to rebound.
Outside of the Colorado River Basin, drought resiliency conversations will be similar. Long story short, enjoy that multigrain loaf of bread in your kitchen today because it could be something you need to splurge on in a few years.