Climate change could increase food inflation globally, study finds

April 3, 2024|Written by |European Central Bank

Climate change is likely to cause an increase in food inflation by as much as 4% in some parts of the world by 2060, a joint study from a climate scientist and the European Central Bank (ECB) found.

Looking at monthly price indices across 121 countries along with temperature and precipitation factors since 1996, the analysis found a consistent price increase in food and inflation as temperatures rose.

The cost of food could increase by as much as 1.5% to 1.8% annually by 2035 or even higher in some hotter areas of the world. Those numbers are likely to increase as climate change worsens, to as much as 4%. The study found that inflation pressure is likely to be higher in the global south, particularly across Africa and South America.

“These numbers that we’re talking about, they’re not kind of a one-off event. These are impacts that we’re projecting from the sort of persistently higher temperatures that we’re likely to experience in the future,” said Maximilian Kotz, lead author and climate scientist at the Potsdam Institute for Climate Impact Research.

“There are going to be future conditions which are going to be persistently bad from the perspective of food prices and inflation,” he added.

The study builds on similar research by the ECB last year which found that by 2030 food inflation in Europe could range between 0.43% and 0.93%. The researchers in both studies highlight the 2022 heatwave in Europe as an example of short-term inflation rises that are likely to become more common and increase inflation volatility.

“This in turn may pose challenges to inflation forecasting and monetary policy, likely increasing the difficulty of identifying temporary supply shocks and disentangling them from more persistent drivers,” the most recent study states.

Kotz said that central banks and financial regulators should take a more holistic approach to risk, which they are starting to do with initiatives like the Network for Greening the Financial System.

However “it doesn’t yet provide such a broad holistic picture as to be able to capture all of these potential nonlinear risks,” he said.

Paul Ekins, economics and environmental policy professor at the University College London Institute for Sustainable Resources, said he was not surprised by the findings. While the agriculture industry is likely to adapt to climate change, “it’s very hard to adapt to some of the kinds of weather effects that we’ve been seeing and especially floods and drought following one after the other”.

The world is already warmer than 1.5ºC on average, he said, which is only going to increase extreme weather events and, in turn, inflation.

“I’m afraid we’re going to see much more of it. And I’m afraid that it’s going to be very destabilising for the societies in poorer countries,” he said.

David Barmes, a policy fellow at the Grantham Research Institute at the London School of Economics, said the study likely underestimates the potential rise in food inflation because it only accounts for temperature and precipitation.

“More research is needed to assess the price stability implications of climate change, environmental degradation and different green transition pathways,” he said. In particular, more needs to be understood about the effects of climate change on international trade.

But overall, the study is one of the most comprehensive studies on climateflation and its effects on food prices, Barmes said.

“This paper makes clear that in a scenario in which we fail to meet environmental goals, we will see increasingly inflationary pressures coming from the repercussions of that failure,” he said.

Central bankers need to think about changing how they traditionally handle inflation, he said. That could mean looking at various tools such as green dual interest rates and assessing supply shocks as they happen.

Ultimately though, there needs to be a shift in institutional thinking and arrangements, and “accepting that fiscal and industrial authorities in particular should perhaps play a more explicit leading role” in managing inflation and climate.

Ekins said inflation targets could change and become as high as 3% as a result of increased climate risks.

“It’s going to be a much less stable environment, fiscal environment, monetary environment and the [central] banks will, I think, have to be more interventionist”.

This page was last updated April 3, 2024

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