Mar 25, 2024 - Energy & Environment

The era of "climateflation" is here, study shows

Illustration of a price tag on fire.

Illustration: Shoshana Gordon/Axios

It may be time to add human-caused climate change to the list of factors likely to worsen inflation, a new study finds.

Why it matters: The data suggests climate change is rippling through entire economies, instead of affecting the availability or price of particular goods.

Zoom in: Published in the peer-reviewed journal Communications: Earth and Environment on March 21, the study shows increasing global average temperatures, more intense and frequent heat waves and other factors are already driving up the prices of food and other goods worldwide.

  • These trends are likely to worsen through 2035, the researchers from the Potsdam Institute for Climate Impact Research and the European Central Bank concluded.
  • The study shows that food inflation could increase by as much as 3 percentage points per year in the next decade due to "climateflation," while climate factors cause overall inflation to climb by between 0.3 percentage points per year to about 1.2 percentage points per year.
  • Some of the biggest inflation increases overall are likely to be seen in already-warmer countries, the study finds.
  • And during the summer months, extratropical regions, such as the U.S. and Europe, are vulnerable to more sudden inflation increases from extreme heat events. This was seen in Europe during its record-hot summer of 2022.

How they did it: The researchers incorporated more than 27,000 observations of monthly price indices across 121 countries in the developed and developing worlds during the 1996 to 2021 period, along with high-resolution weather observations.

  • To project forward to 2035 as well as 2060, they used an ensemble of 21 different versions of the latest climate models under separate emissions scenarios.
  • The study also examines the role of adaptation to climate change during the past few decades and into the near future. They found little evidence it reduces inflationary pressures.

What they found: The study underlines the finding, also shown in many other studies, that climate change is getting increasingly costly.

  • Researchers showed that shifts in average temperature along with the occurrence of heat extremes have the biggest, longer-lasting impacts on inflation.
  • They did not find clear indications of a robust relationship between precipitation shifts and inflation, which is similar to findings from other studies. However, the authors attributed this to precipitation's higher variability that makes it more difficult to model.
  • "We find that the temperature conditions projected for 2035 under future warming imply upwards inflationary pressures across all of the world," the study states.

Context: This is not the first study to note the economic toll of climate change, or even the inflationary pressures of increasing temperatures and extreme weather events.

  • But it is extremely detailed and answers key questions that had not yet been addressed, including how the relationship between climate change and inflation may play out in the coming decades.

Zoom out: Maximilian Kotz, a climate scientist at the Potsdam Institute for Climate Impact Research and a co-author of the study, tells Axios via email that "[c]ountries at lower latitudes are already hotter, so they are closer to the thresholds at which temperatures begin to be damaging for crop and labour productivity (as identified in previous literature by various other authors)."

  • "Therefore these regions suffer more when temperatures increase," he adds.

What they're saying: "'Climateflation' is all too real, and the numbers are striking," said Gernot Wagner, a climate economist at Columbia Business School who was not involved in the new study.

  • "The key bit this study shows: Climateflation does not just affect food prices, its effects reverberate through to core inflation numbers," he told Axios via email, noting the over 1% increase in overall inflation.
  • "That 1% alone — or even the study's lower bound of 0.3% — is enormous," Wagner said, pointing to the Fed's goal of stabilizing inflation at 2%.
  • He said climate change's role in inflation could be "a significant part" of the Fed's considerations just a decade from now.
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