A burned Valero gas station smolders during the Creek fire in an unincorporated area of Fresno County, California on September 8, 2020. (Photo: Josh Edelson/AFP via Getty Images)

The Fed Should Not Punish Working People for Inflation Driven by Big Oil's Greed

Interest rate hikes are a blunt and imprecise tool that won't tackle current sources of inflation, particularly our overdependence on volatile fossil fuels. The best way forward is to shift finance away from fossil fuels, and jump-start a transition to renewable energy.

If you own a car, pay energy bills, or buy groceries, then you have probably noticed that prices are soaring. The cost of food is up 10% and the cost of a gallon of gas is up 50% from a year ago. And in May this year, median monthly rent hit a record high at $2,002. We're experiencing the highest levels of inflation in 40 years, which is taking a particularly harsh toll on low-income households.

Two important drivers of inflation are especially dangerous--fossil fuels and corporate greed.

As consumer prices rose to 8.6%, the Federal Reserve--the US central bank, and the institution tasked with maintaining price stability--decided it's time to act with the largest interest rate hikes in 28 years. And it's poised to keep raising rates aggressively in its attempt to tame inflation.

The basic idea is that raising rates will increase the cost of borrowing, making it harder for households and businesses to get credit and therefore dampening demand, which is believed will bring prices down. But this approach will fail to address the sources of current inflation that aren't related to demand--particularly our overdependence on volatile fossil fuels. Instead, forcing up interest rates could thwart the economic recovery from Covid-19, eat into workers' wages, and plunge millions into unemployment, which will hurt the poorest members of society the most.

In this time of overlapping crises--a pandemic, war, and the climate crisis--we need to understand what's really driving inflation and destabilizing our way of life so that we can develop more tailored responses that won't hurt working communities.

There is a wide range of causes for the current increase in prices. These include supply chain disruptions, exploitative pricing and profiteering by big companies, and geopolitical conflict. Amongst these, two important drivers of inflation are especially dangerous--fossil fuels and corporate greed.

America's overdependence on fossil fuels exposes ordinary people to price volatility. When Russia, a major supplier of oil and gas on the world market, invaded Ukraine, prices went soaring even higher. This is an example of how global geopolitical tensions can shock supplies and prices with potentially catastrophic economic consequences at home, forcing families to decide between putting food on the table or paying electricity bills. And because fluctuations in the cost of oil impacts everything--transportation, production, cooling, and heating--the consequences can reverberate throughout the economy and quickly strip people of their livelihoods.

As long as we depend on fossil fuels for our energy, we'll continue to be exposed to such dangers because oil and gas are volatile and unreliable commodities.

To make matters much worse, oil company CEOs have vast amounts of unchecked power, allowing them to keep prices at the pump high and rake in record profits. While people and families everywhere struggled to pay their bills and fill up their tanks, oil companies brought in over $41 billion in profits just in the first three months of 2022--profits that they're using on stock buybacks and to enrich shareholders, instead of investing productively.

Many large companies across the U.S. are capitalizing on inflation. In sectors where only a few dominate the market, these mega corporations have huge power to set high prices and not worry about losing customers.

At the same time, the fossil fuel industry and its political allies are using this moment of overlapping crises to attack the Biden administration's climate initiatives and to double down on domestic oil production. We know this is a false solution primarily because it's more profitable to export gas, which the U.S. continues to do despite skyrocketing domestic prices.

Caught in the crossfire of corporate greed and fossil fuel volatility are people, particularly low-income and communities of color. These companies don't care about our communities, and they certainly don't care about the planet. As it happens, fossil fuels are also driving climate change, which brings a whole new level of price and financial instability.

Climate disasters are destroying infrastructure, homes, jobs, and businesses, and disrupting supply chains. All this is costing billions of dollars every year and adding inflation risk--just look at crop failures from increasingly frequent and prolonged droughts. There's little hope of price or financial stability in a world that lurches from one disaster to the next, and this could result in an economic crash that could be worse than 2008.

As the supervisor of our financial system, the Fed can start by cracking down on Wall Street's reckless fossil fuel financing. It has a number of tools at its disposal, ranging from setting limits on how much greenhouse gas pollution a bank can finance to even bolder action such as requiring that banks stop financing the climate crisis, and instead align their investments with science-based emissions targets.

By aiding the switch to an economy powered by clean and abundant renewable energy, the Fed can help reduce inflation and climate risk, drastically lower energy bills, create thousands of good-paying jobs in the process, and bring long-term price and financial stability.

It's worth noting that there are limitations to what the Fed can do to manage inflation. That's why we need closer coordination between the government and the Fed to control inflation. And right now, we urgently need our policymakers to act as well. One smart move they could make is to pass a windfall profits tax. This is currently happening in the UK. The money raised from this kind of tax could also help fund investments in a green transition.

Inflation is complex and demands a deeper look beneath the surface which usually reveals that we need wide-ranging tools to effectively manage rising prices. Austerity-based measures like interest rate hikes threaten our chances of investing in a robust economic recovery to help build a stable and socially just future.

Corporate greed and fossil fuels are massive challenges that demand better responses. Getting off fossil fuels and transitioning to renewable energy is a long-term solution that can help us build a fair and sustainable economy on a planet that will remain habitable for generations to come. It's time our public institutions step up and lead the way there.

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