Dive Brief:
- Rising temperatures could increase inflation by as much as 1.2 percentage points per year by 2035, with food inflation increasing by up to 3.2 percentage points annually, researchers from the Potsdam Institute for Climate Impact Research and the European Central Bank concluded in a recent study.
- Inflationary effects associated with climate change will affect all regions of the world, but the Global South could be disproportionately affected, the researchers said. Low-latitude areas are expected to see year-round inflationary pressures, as opposed to the seasonal effects higher latitude areas could face.
- The researchers said that beyond 2035, “the magnitude of estimated pressures on inflation diverges strongly across emission scenarios, suggesting that decisive mitigation of greenhouse gases could substantially reduce them.”
Dive Insight:
Researchers analyzed weather data across 121 countries and consumer price indices over the last 30 years to drive their conclusions. The study also looked at future climate model projections.
In high latitudes, increases in average temperatures are likely to cause inflationary pressures during the hottest month of the year. By contrast, average temperatures will remain high enough in lower latitudes to drive inflationary pressure year-round, researchers said. Africa and South America will be among the most affected regions, according to researchers.
Looking at the inflationary impact of extreme heat in Europe in the summer of 2022, researchers said weather conditions across the three hottest months resulted in a cumulative annual impact of 0.67 percentage points on food inflation and 0.34 percentage points on headline inflation.
“Future climate change will amplify the magnitude of such heat extremes, thereby also amplifying their potential impact on inflation,” the study said.
The extent of inflationary pressures is highly variable depending on the emission scenario. In a best-case model, pressures on inflation are marginally higher in 2060 than 2035. A worst-case emission scenario, on the other hand, could significantly heighten inflationary pressures, where food inflation would exceed 4 percentage points per year across large parts of the world, according to the report.
Persistent inflation from rising temperatures could have a significant impact on monetary policy, researchers noted, suggesting central banks may need to make monetary policy decisions based on weather and climate shocks.
Nicki Harrison, director of sustainable finance at Environmental Defense Fund Europe, echoed researchers’ concerns and called on policymakers to take action in an email sent to ESG Dive. She urged central banks to incorporate climate change impact forecasting into their macroeconomic modeling.
“If we don’t take action now to invest in mitigating the worst effects of our warming planet, the cost will be borne by each and every one of us in the future through high inflation affecting the price of food and everyday essentials,” Harrison said.