New research says that climate change is accelerating inflation in dozens of countries around the world. And the trend is awaited to continue as the planet heats up.
So says a report published last week by the European Central Bank. The researchers set out to examine the impacts of global warming on inflation in 121 countries, and they found that higher-than-average temperatures are driving up the fetch of food and other goods and services.
While it’s a worldwide phenomenon, the researchers said the most significant impacts likely will be felt in the Global South, specifically Africa and South America.
“These results suggest that climate change poses risks to price stability by having an upward impact on inflation, altering its seasonality and amplifying the impacts caused by extremes,” says the report, which was a joint effort by observers at the European Central Bank and the Potsdam Institute for Climate Impact Research.
The Impact of Climate Change on Global Inflation Rates
The findings come amid efforts by central banks and financial regulators to understand the economic threats of climate change better. That has entailed securities regulators looking to require public companies to reveal their climate risks and strategies and central banks conducting stress tests or scenario analysis exercises to gauge lenders’ climate vulnerabilities.
Even so, the report authors noted that research on the implications of extreme weather for inflation is still developing. So they took a stab at it.
They used a dataset of monthly consumer price indices across all 121 countries to identify how rising temperatures affected prices in different seasons and regions over the last three decades. That data allowed them to estimate the historical impacts of the higher temperatures on inflation over 30 years.
One of those estimates examined Europe specifically. The researchers focused on the extreme heat and drought that plagued the region last summer, which hindered agriculture and economic activity.
After accounting for other factors such as Covid-19 and Russia’s war on Ukraine, the authors estimated that extreme heat alone boosted inflation in the region by 0.67 per cent — and by even more in southern Europe.
They then combined those historical estimates with future climate scenarios to predict how climate change could affect inflation.
The result: Rising temperatures could increase global inflation by as much as 1 per cent every year until 2035, the researchers wrote. When they examined food inflation specifically, they found that future warming could drive up prices by as much as 3 per cent.
“Future climate change will amplify the magnitude of such heat extremes, thereby also amplifying their potential impacts on inflation,” the report says, both of which have significant implications for price stability and “wider social welfare.”
Climate Change as a Catalyst for Inflation
There are several channels through which climate change can sustainably raise prices. The frequency of extreme airy events (such as fires, floods, and drastic temperature changes) that significantly impact the costs of certain goods (climatization), especially food and energy, has increased due to supply chain disruptions and higher insurance premia. The increase in temperatures and pollution-related diseases also deteriorate human capital and cause a reduction in productivity and economic efficiency levels (all else being equal). Recent European Central Bank research has highlighted how inertia in combating climate change can lead to structurally higher inflation (up to half a percentage point annually), concluding that a well-managed ecological transition would minimize the inflationary impact of global warming. This is first because the effects would be temporary and then because the frequency of extreme events would tend to decrease, thereby reducing the costs associated with mitigating their effects (ECB 2021).
Higher taxation of fossil fuels (for example, the carbon border tax) and the rise in the price of emissions announced by the European Commission in its Fit for 55 packages under the Emission Trading System1 will be partly passed on to consumers and enterprises, leading to an increase in production and consumer prices.
Moreover, during the transition, the demand for some energy sources (for example, natural gas) will grow significantly, especially if emerging market economies accelerate the growth from coal. Furthermore, the acceleration of the ecological change employing “mineral-intensive” technologies is generating a booming demand for raw materials, especially the “critical” ones (tin, aluminium, copper, nickel, cobalt, as well as “rare earth”) — highlighting their economic importance and the risk that underpins their supply. The markets for minerals will not be able to satisfy the request in the short term, especially considering that the store is concentrated in the hands of a few (geopolitically relevant) players, including China. This year, the prices of metals essential for green technologies have risen between 20% and 91% (granulation).
In addition, the war initiated by Russia in Ukraine has exacerbated tensions. Given the significant weight of both countries as global suppliers of raw materials, the conflict takes a substantial share of the world’s production of these resources from the market. Should the match continue, the increase in the prices of raw materials would remain sustained in the long term.
