Inflation – a Worthy Combatant in the Fight Against Climate Change. But Are We Ready for What Follows?

Inflation – a Worthy Combatant in the Fight Against Climate Change. But Are We Ready for What Follows?

Naveen Krishnamurthy

Naveen Krishnamurthy

Vice President, Executive Partners

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A few weeks ago, I was speaking with an executive in one of our client companies, and the conversation took an interesting turn. The topic of discussion: Ways for society and, in particular, his industry to decarbonize. In the spirit of all options are on the table, he stopped and asked me: “What about consumer demand? Is there a way to reduce that?”

The implication was that companies cannot, in good conscience, produce less if consumers continue to demand high rates of production. So, how can companies decarbonize if consumer demand doesn’t allow them to. For me, this was an instance where the messenger posing this conundrum was as intriguing as the message itself.

First, a lens with which to examine the message.

Surely, much has been discussed about how consumers are at best ignorant of, and at worst complicit in, climate change. The more we consume, the more we seem to demand; the more we demand, the more gets produced; the more we produce, the more we emit. Curiously however, we now find ourselves in an economic backdrop of high inflation that might prove to be an uninvited comrade in our efforts to taper climate change.

But First, Why Is It so Hard to Curb Demand?

  • Growing disposable incomes in large and fast-growing economies (India and China are just two examples) are allowing populations to retrace the path that prior generations of consumers in industrialized nations have long championed. This has happened so robustly that, as a consequence of the global consumer’s unbridled consumption, the UN has formulated conscious consumption as one of its 17 Sustainable Development Goals (SDGs).
  • Meanwhile, here in the U.S., as recent trends in demand for new cars have shown, even when semiconductor chip shortages have crippled automobile production during the pandemic, demand for new cars remained strong — essentially leading to rapid inflation in new car prices. That is to say — notwithstanding supply shocks — the heart wants what the heart wants.

So, If Curbing Demand Is That Hard, Is It Likely to Even Occur in the near Future?

  • In the U.S., even though nominal household incomes have been growing around 3%–5%, real incomes are now declining in the face of corrosive inflation. And there is no end in sight for that inflation — even as governments attempt counter measures, albeit benign so as not to tip the economy into a recession. Consequently, there is a fair chance consumers will start pulling back on purchases — as they are wont to do when they sense the onset of a period of persistent inflation. How do we know this pullback is coming? Well, we know one thing to be true — from lessons gathered during periods of high gasoline prices, expressed via this opprobrium: The cure for high oil prices is high oil prices. As oil prices go up (and stay up), average miles driven tend to decrease. As goes for high oil prices, so goes for prices for movies, popcorn, and parking. The cure for high prices does indeed tend to be high prices — as exhibited by an eventual decline in consumer demand.
  • This time, we may be in for a sustained period of low demand. From Thailand to the U.S., economists have begun lowering GDP growth estimates for this year and next. In fact, a slowdown in GDP growth in the U.S. is already underway. And since 70% of the GDP is composed of consumer spending, these lower GDP growth estimates are baking in lower consumer spending through next year.
  • “But can consumer behavior really change permanently?” you ask. Recent experience during the pandemic has shown that new behaviors (“Zooming,” “Pelotoning,” “WFH,” and others) have indeed taken root. Technologies that mediated these behavioral changes existed previously, but consumers seemingly needed a robust impetus (e.g., a pandemic) to trigger wholesale shifts. Incidentally, some of these behaviors also happen to result in lower consumption — even if it’s merely scaling back on purchases of dress shoes/high heels, given that most Zoom business meetings occur “from the waist up.”

The Gains and the Losses

This is to say that a period of persistent inflation, say for the next 12 months, might be just what the doctor ordered in our search for lower inflation — the beneficial side effect being a meaningful downward inflection point in the rate of climate change. The less we demand, the less we produce; the less we produce, the less we emit.

But clearly, the impact of widespread/runaway/hard-to-ameliorate inflation is destructive to economies, industries, and consumers. So, I am not advocating for (or against) inflation. And of course, high inflation is not the only miscreant hard at work on the global economy: COVID-induced shutdowns, the war in Ukraine, and a litany of other struggles created by geopolitical, climate, and other factors will all conspire to diminish consumer demand.

Will consumer spending eventually be able to scale this wall of worry? Perhaps. But let’s assume for a minute that just like COVID created some long-lived shifts in consumer behavior around the world, a period of persistent inflation does indeed trigger long-lived curtailment of consumer demand. Sure, we could look forward to a potentially lower pace of climate change. But is the economy ready for a less ravenous consumer?

In Other Words, If Decline in Consumer Demand Becomes Sticky, Are We Ready for It?

  • Periodic downturns — every 7–10 years or so — in economic cycles have forced us to consider this question. So, the institutional memory within each of our organizations can potentially inform us on how to foresee, circumvent, and react to relatively short-lived declines in demand that accompany economic downturns. But there is little in our organizational memory that informs us on how to act if the next recession sparks unfavorable consumer behavior that remains with us long after the recession is in the rearview mirror.
  • Additionally, this time around, chemical producers (and oil and gas producers) could be particularly vulnerable. Going into a cycle of monetary tightening orchestrated by the U.S. federal government means borrowing to fund large capital projects just got very expensive — and we know that many chemical and oil and gas leaders have committed to spending whatever it takes to innovate and build a path toward decarbonization. These companies will struggle to make the economic case to continue to support large, expensive capital outlays on relatively risky, innovative projects in the face of chronically slowing consumer demand.

So, a decline in rabid consumerism might be salubrious for the planet, but what does it do for Starbucks’ innovation and go-to-market models or General Motors’ plans to construct a charging ecosystem to support the electric Cadillac?

The Messenger

At this juncture, a note on the messenger. The executive who posed the question that started this line of thought is an innovation leader at an oil and gas major. Why would an executive at an oil and gas firm even ponder a decline in consumer demand — unless he has been sensing undertones of this idea creep into his own conversations with innovation leaders in end-industries that his company serves.

That leads us to this: If declining consumerism is indeed a serious threat for large companies that are directly or indirectly tethered to consumer demand:

  • How can an R&D leader build the right innovation portfolio that does not implicitly rely on an assumption of rising consumer demand over the next 24 months?
  • How should a commercial leader de-risk her consumer-behavior-reliant aspirations as she seeks to unveil 2–3 new products and services over the next 18 months?
  • And how might a corporate strategy leader go about crafting a downturn-proof sustainability strategy?

Talk to Us

We bring ideas and inspiration from across industries to address questions like: How vitally does your sustainability strategy rely on customers consuming the same way they used to? Are you prepared for a world with decelerating consumer demand? Join us for an executive roundtable to share lessons among peers in noncompetitive companies. Email me at: [email protected].

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