Climate change is accelerating inflation in dozens of countries around the world, new research says. And the trend is expected to continue as the world 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 cost of food and other goods and services.
The uptick in prices then ripples across the global economy.
While it’s a worldwide phenomenon, the largest impacts likely will be felt in the Global South, specifically Africa and South America, the researchers said.
“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 researchers at the European Central Bank and the Potsdam Institute for Climate Impact Research.
The findings come amid efforts by central banks and financial regulators to better understand the financial threats of climate change. That has entailed securities regulators looking to require public companies to disclose 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 itself is still nascent. So they took a stab at it.
They did so by using a dataset of monthly consumer prices 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 historic impacts of the higher temperatures on inflation over 30 years.
..we find that increased average temperatures cause non-linear upwards inflationary pressures which persist over 12 months in both higher- and lower-income countries. Projections from state-of- the-art climate models show that in the absence of historically un-precedented adaptation, future warming will cause global increases in annual food and headline inflation of 0.92-3.23 and 0.32-1.18 percentage-points per year respectively, under 2035 projected climate (uncertainty range across emission scenarios, climate models and empirical specifications), as well as altering the seasonal dynamics of inflation. Moreover, we estimate that the 2022 summer heat extreme increased food inflation in Europe by 0.67 (0.43-0.93) percentage-points and that future warming projected for 2035 would amplify the impacts of such extremes by 50%. 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.