Carbon Prices and Inflation in a World of Shocks

Climate change and geopolitical tensions render supply shocks more likely, which can trigger inflation Additionally, the EU’s emissions trading system can give rise to volatile carbon prices, potentially causing inflation. Through simulations using an input-output price model for Germany, this study shows that the same systemically significant sectors – those essential for human livelihoods, production and commerce – are particularly vulnerable to both shockflation and carbonflation. A total of 77 to 78 percent of potential carbonflation can be attributed to just six systemically significant sectors. The challenge for policymakers is to design policies that combine transformation with stabilization. Enhancing resilience, reducing price volatility and designing green industrial policies for these key sectors can reduce the macroeconomic risks of both carbonflation and shockflation.