A recent study, conducted by European Central Bank (ECB) experts in collaboration with researchers from the Potsdam Institute for Climate Impact Research PIK, has unearthed alarming insights into the economic repercussions of climate change.
The findings, outlined in the working paper, “The impact of global warming on inflation: averages, seasonality and extremes,” suggest that escalating average temperatures may trigger a surge in annual food and headline inflation by as much as 1.18% by the year 2035.
This revelation underscores the profound impact climate change could have on global economic stability, transcending geographical and socioeconomic boundaries as the “effect [of rising temperatures on food and headline inflation] persists over 12 months in rich and poor countries alike,” the study authors note.
Drawing on historical climate data, the researchers scrutinized climate indices like high temperatures and extreme rainfall, among others, to assess their correlation with inflationary trends. They used these past climate impacts on inflation to assess risks under a future scenario with no adaption measures in place.
Their analysis revealed a disconcerting pattern: as temperatures soar, inflation rates escalate, with particularly pronounced effects observed in warmer climates, including many regions in the Global South.
Maximilian Kotz, the study’s lead author and scientist at the Potsdam Institute for Climate Impact Research PIK, emphasized the non-linear relationship between temperature variations and inflation rates:
“We find that the inflation response to average monthly temperature increases is non-linear. That means inflation goes up when temperatures rise, and it does so most strongly in summer and in hot regions at lower latitudes, for example the global south.”
The study also offers a stark warning based on real-world events, pointing to the scorching summer of 2022 in Europe, which had a “wide-spread impact on agriculture and the economy,” as a harbinger of future challenges.
“Using our results, we estimate that the 2022 summer extreme heat increased food inflation in Europe by about 0.6%,” Kotz said, adding:
“Future warming projected for 2035 would amplify the impacts of such extremes by 50%.”
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Of particular concern for Kotz is the implication for currency unions like the Eurozone, which operate under a stringent inflation target of two percent. As climate change-induced extremes become more frequent and severe, their effects on inflation “will continue to increase,” Kotz warns.
The study serves as a clarion call for proactive measures to mitigate and adapt to climate change. Without concerted efforts to curb greenhouse gas emissions and bolster resilience against extreme weather events, the study authors warn that “extremely hot summers could […] pose an increasing risk to inflation and price stability.”
In light of these findings, policymakers should prioritize climate action as an integral component of economic policy, recognizing that the battle against climate change is intrinsically linked to the pursuit of sustainable and resilient economies for future generations.
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — Cover Photo Credit: Nathália Rosa.
