Mind Readings: Climate Change is Structural Inflation

In today's episode, let's talk about structural inflation. What is this? Well, anything that is structural is systemic. It means that it's built into the system itself. So you talk about something like structural unemployment, it means there's been some societal change that is creating ongoing, recurring unemployment.

Structural inflation is exactly as it sounds like something that's changed that is creating uh inflation. As a quick reminder, inflation is what happens when prices go up. Something happens that causes prices to inflate. And that can be from any number of reasons. It can be from an increase in the money supply itself, more money without a commensurate amount of more goods, means that there's just more to be spent from currency and supply in circulation, and so prices go up.

That's one of the dangers of just outright printing money with no backing. You've seen hyperinflation in places like Venezuela, for example, back in the 1990s. It can come from supply chain problems, right? As we saw during the the peak of the pandemic, when there were just disruptions everywhere, not enough labor, things that just couldn't get made fast enough, and demand outstripped supply, and prices went up. Anything that causes prices to go up really is a form of inflation.

One of the biggest forms of inflation that we're not thinking about enough and that we're not focused on enough is structural inflation coming from climate change. As climate gets more unpredictable and wild variations like freak storms and more intense droughts and things, all these factors, as they increase, they'll put more pressure on the operations of businesses. The ability to produce stuff uh in a timely fashion, to be ability to produce stuff at a low enough cost to make it profitable. That's going to create ongoing structural inflation. And it's going to affect pretty much every sector because there isn't a sector of industry that isn't in some way connected to other parts.

It may be distantly connected, but it is connected. For example, suppose food prices go up because crops were destroyed by a really bad drought. That means that consumers have to spend more money to obtain either the same good or a replacement good. And if they have to spend more money on that, they have less to spend on other things. My company, Trust Insights, we're a consulting company.

We focus on things like artificial intelligence, data science, analytics, etc. We don't do anything in food. We don't do anything in agriculture or CPG, uh, consumer products and goods. But if a consumer has less money to spend, they will spend it, you know, on the things that are important to them first, which in turn makes those companies that they would otherwise have done business with have lower profits. That in turn takes vendors, goes the supply chain through vendors to the point where it might affect us down the road when people say, like, yeah, there's just not enough business to justify hiring an AI consulting firm because our customers cut back spending because their customers are cut back spending and so on and so forth.

Structural inflation is one of those things that you have to be able to see it coming. And you have to be able to take precautions in advance so that you know how to offset it. And ways you can offset it. Uh, as a consumer, as an end consumer, it's knowing that prices are going to get more expensive, knowing that there are factors at play that will increase your costs and altering your lifestyle as appropriate. For example, dining out.

Dining out has gotten crazy expensive, at least here in the USA where I'm based. A meal that, you know, 20 years ago was $40 for two people is now a hundred dollars for two people. And the meal isn't any bigger, in fact, it's probably a little smaller, and the quality isn't amazingly better. It's it's about the same. Why the changes?

Well, inflation. Inflation across the board. Wages have gone up, which is a good thing. We generally agree that people should be able to earn a living wage, but that causes prices to go up. If you want to offset that as a consumer, the logical thing to do is to dine out less, right?

And to learn how to cook your favorite foods and your favorite dishes so that you can still enjoy the quality of life that you like without having to expend the money. That of course will have ripple effects throughout the supply chain, but as an individual, that's something you can do to offset structural inflation with climate change. As a business, part of your scenario planning has got to be well, what happens if we see a massive change in our industry? What happens if three of our biggest customers go out of business? It's the same business continuity planning you've always been doing, with the acknowledgement that the once-in-five hundred years events are becoming more like once-in-ten-year events.

Your disaster planning, your business continuity planning, your all of your scenario planning should be taking that into account. How do we plan for this wild and crazy time when a freak hurricane in the middle of December might wipe out a whole bunch of crops that would then have substantial upstream and downstream impacts? Part of what if you don't already have it, you should do it is just a map of who is in your who is in your value chain, who are your suppliers, and who are your customers, who are their suppliers, who are their customers, and so on and so forth. Try and diagram out the tangled web of your business and then start running scenarios. If you are a company that you, for example, uses generative AI, and you use, say, OpenAI's chat GPT.

What is your plan if OpenAI folds? If this is a tool that is essential to your business and they fold, what are you going to do about it? What is your business continuity plan? What is your plan? If your biggest customer says, we got to tap out, you know, we just can't do this anymore.

That's where you see things like you know diversified streams of income, diversified sources of revenue, different strategies like that to accommodate the changing landscape, making sure that you're not over indexed in any one area to the extent that you can so that you're more resistant to serious change. So the key takeaways here, structural inflation is inflation that is built in because of the nature of some kind of systemic change. The one we're talking about today is climate change. As climate change gets worse, uh structural inflation will go up because it will be harder to get your supply chain to work properly in a reliable and predictable manner. And the ways to deal with that are to identify the weak spots in your supply chain and in your value chain entirely, and then mitigate that to the best extent possible.

But at the very least, diagram it out so that you know what your risks are, and therefore you can take it, take some shelter from those risks and try and get ahead of them. Thanks for tuning in. We'll talk to you next time. If you enjoyed this video, please hit the like button. Subscribe to my channel if you haven't already, and if you want to know when new videos are available, hit the bell button to be notified as soon as new content is live.