Global Warming and Heat Extremes to Enhance Inflationary Pressures

April 18, 2024Published by Communications Earth & Environment

Climate change will increase global food and headline inflation in non-linear, persistent and geographically varied ways with adverse effects on price stability, according to this joint study by the European Central Bank and the Potsdam Institute for Climate Impact Research.

The authors state that, overall, rising average temperatures and heat waves will increase inflation volatility, posing substantial challenges for inflation forecasting and monetary policy.

The paper provides a detailed analysis of the relationship between weather conditions such as temperature changes, weather shocks and precipitation on food and headline inflation.

The authors – Maximilian Kotz, Friderike Kuik, Eliza Lis and Christiane Nickel – model the impacts of average temperatures, temperature variability, and precipitation and heat extremes. To do so, they used fixed-effects panel regression models to quantify the impact of fluctuations in historical weather conditions, on national, month-on-month inflation rates from 121 countries between 1996-2021.

The results were then combined with projections from physical climate models to assess the inflationary implications of future climate change.

The paper’s analysis shows that projected long-term warming trends in advanced economies may see food prices increase on average between 1-2% by 2035, with even more pronounced effects across Africa, South America and South Asia.

The authors found strong seasonal patterns in the results, with upward inflation pressure in summers and downward pressure in winters at higher latitudes, or the global north. However, consistent upward pressure is expected year-round at lower latitudes.

Such climate-driven inflation variation is particularly problematic for monetary unions like the EU, as a single currency will be exposed to varied inflationary effects that could exacerbate pre-existing welfare discrepancies, state the authors.

When adjusted for projected temperature changes by 2035, extreme heat events are likely to place upward pressures of up to 3% on annual food inflation. As climate change amplifies the intensity and frequency of heat extremes, authors expect this to increase inflation volatility as it did during the European heatwave in the summer of 2022.

The results also show that excess wet conditions cause upward impacts on both food and headline inflation that persist over the 12 month observation period.

However, impacts of such weather events diverge strongly across different greenhouse gas emission scenarios, underscoring the importance of decisive mitigation to reduce inflation in the long run. Under a worst-case emissions scenario, the pressures on food inflation may exceed 4% across large parts of the world by 2060.

The report suggests that weather-dependent forecasts for production and inflation may also help mitigate the challenges identified in this paper. However, while these and other novel technological adaptation measures could help limit inflation pressures, the authors conclude that significant mitigation of greenhouse gas emissions is still necessary to reduce the long-term risks.

This page was last updated April 19, 2024

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