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Global warming is coming for your shopping cart

A team of economists dig into a relatively under-studied area: Climate inflation
April 16, 2024

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Climate change is already increasing food prices and overall inflation, and these effects are likely to accelerate in the future, according to a new study.

The findings add heft to a growing collection of research on the effects of climate change on the economy. In this area, climate-related inflation has been relatively under-studied—a key oversight “because rising or unstable prices threaten economic and human welfare as well as political stability,” researchers from the European Central Bank and the Potsdam Institute for Climate Impact Research write in the journal Communications Earth & Environment.

The analysis rests on more than 27,000 month-by-month data points on prices of food and other consumer goods since 1996 gathered from 121 nations around the world. The researchers combined this information with data on temperature and other climate factors, controlling for a suite of variables to identify likely causal links between changes in weather and higher food prices.

In 2022, for example, a severe summer heat wave in Europe reduced food supplies and triggered an increase of two-thirds of a percentage point in food prices and one-third of a percentage point of overall inflation.

Of the various climate factors analyzed, increases in average monthly temperature have the strongest effect on food prices, the researchers found. But increases in the day-to-day variability of temperatures from day to day and floods also contribute to boosting food prices.

 

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The researchers then used data from climate models to forecast the effect of future climate change on food prices and overall inflation. Several previous studies have used historical weather data to identify the impacts of changing climate parameters on inflation. But this is the first to run the tape forward and calculate implications for the future.

Climate change could cause food prices to increase by 1.5 to 1.8 percentage points annually by the middle of the next decade, the researchers report. The lower number reflects a best-case (that is, lowest greenhouse gas emissions) scenario, and the higher number a worst-case (highest emissions) scenario. Overall inflation is projected to increase 0.8-0.9 percentage points annually by 2035 due to climate change.

Shorter term, more irregular price shocks are also likely to come from increased frequency and intensity of extreme heat. The level of average warming projected for 2035 could result in heat waves with effects on prices 30-50% greater than those of the 2022 European heat wave, they calculated.

Climate-related inflation is projected to occur all over the world. It is likely to be most pronounced in regions that are already hot—including many countries of the Global South that have contributed relatively little to historical emissions and have less climate resilience. But climate inflation is likely to pack a wallop even in the Global North, the researchers found.

Looking further into the future, low-emission and high-emission scenarios diverge, underscoring the importance of climate action to hold climate inflation in check. By 2060, inflation due to climate change is projected to raise food prices by 2.2-4.3 percentage points annually, depending on the emissions scenario, and boost overall inflation by 1.1 to 2.2 percentage points yearly.

“Our results suggest that climate change is likely to alter inflation seasonality, increase inflation volatility, inflation heterogeneity and place persistent pressures on inflation levels,” the researchers write.

Source: Kotz M. et al. “Global warming and heat extremes to enhance inflationary pressures.” Communications Earth & Environment 2024.

Image: ©Anthropocene Magazine

 

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