How Climate Change Contributes to Inflation

A groundbreaking study published in the peer-reviewed journal Communications: Earth and Environment suggests that human-caused climate change could be added to the list of factors exacerbating inflationary pressures worldwide.

The research, conducted by experts from the Potsdam Institute for Climate Impact Research and the European Central Bank, sheds light on how climate change is not only influencing the availability and price of specific goods but is also impacting entire economies.

According to the study, increasing global average temperatures, coupled with more intense and frequent heatwaves, are driving up prices of essential commodities like food across the globe. These trends are expected to escalate further through 2035, with significant implications for inflation rates.

The study forecasts that food inflation could surge by up to 3 percentage points per year in the next decade due to what researchers term "climateflation." Additionally, overall inflation could rise by anywhere from 0.3 to 1.2 percentage points annually as a result of climate-related factors.

Notably, regions that are already warmer, particularly those closer to the equator, are likely to experience more pronounced inflationary pressures due to rising temperatures. Furthermore, extratropical regions such as the United States and Europe are vulnerable to sudden spikes in inflation during the summer months, particularly during extreme heat events like those witnessed in Europe during the record-hot summer of 2022.

The study, which analyzed over 27,000 monthly price indices across 121 countries from 1996 to 2021, utilized a comprehensive ensemble of climate models to project inflation trends up to 2035 and 2060. Despite examining the role of adaptation to climate change, the researchers found little evidence to suggest that it mitigates inflationary pressures.

While previous studies have highlighted the economic consequences of climate change, this latest research offers detailed insights into the complex relationship between climate change and inflation, addressing critical questions about future inflationary trends.