Is climate change to blame for inflation?
Not only can climate change affect your commute - it also affects the price of your food.
As global citizens (and Helios employees), we think and worry about climate change all the time. We worry about how rising sea levels will flood our cities, how hotter summers will make outdoor activities impossible, and, most importantly, how a changing climate dramatically affects agriculture. We’re in good company it seems, as central bankers are now realizing that the continuing impacts of climate change are likely to keep inflation high for the foreseeable future. Stay with me as we get a little wonky this week!
Historically, agriculture has been sensitive to weather patterns, but the frequency and severity of climate-related disruptions are unprecedented. For instance, olive production in southern Europe has faced severe setbacks due to rising temperatures and decreasing rainfall. Giuseppe Divita, an olive mill owner in Sicily, notes that these conditions have pushed olive oil prices to 20-year highs due to drastically reduced yields. Similarly, staple crops like wheat and maize are showing sharp declines in productivity when temperatures exceed certain thresholds, such as the 27.8C - a critical point for wheat yields.
These disruptions are not confined to a single region or crop. Across the globe, from oranges in Brazil to coffee in Vietnam, permanently shifting weather patterns are squeezing supplies and driving up prices. A recent study by the European Central Bank and the Potsdam Institute for Climate Impact Research projects that global food inflation rates could rise by up to 3.2% annually within the next decade due to higher temperatures. The reality is stark: as climate change intensifies, the agricultural sector is increasingly vulnerable to extreme weather events like floods, droughts, and heatwaves, which in turn undermine food security and economic stability.
The link between these agricultural disruptions and rising food prices is clear and direct.
To your left: Maps of the pressure on annual national inflation in the food (a) and headline (b) price aggregates from the average weather conditions expected by 2035. The annual pressure on inflation aggregated across world regions (population weighted), at different periods under both a low (SSP126) and high (SSP585) emission scenario for food (c) and headline (d) price aggregates. Source
Higher input costs, such as the need for irrigation in previously rain-fed areas and increased pesticide use, add to production expenses, which are passed on to consumers as higher prices. Adam Davis of Farrer Capital highlights that commodities like wheat, palm oil, and pork have seen price increases of 17%, 23%, and 21%, respectively, due to climate change. The lag effect of these high commodity prices means that consumers continue to face higher food bills, contributing to overall inflation. In the UK, for instance, a third of the food price increases in 2023 were attributed to climate change.
So what’s next? Looking ahead, the next decade poses significant concerns as the world grapples with the dual challenges of feeding a growing population and mitigating climate change. As temperatures continue to rise, we can expect more frequent and severe disruptions to agricultural production, leading to persistent inflationary pressures. Central banks, which traditionally exclude volatile food prices from core inflation measures, may need to rethink their strategies as food price shocks become more common and sustained. The global south, already bearing the brunt of these impacts, is likely to suffer the most, exacerbating economic disparities and challenging global food security. Addressing these issues will require a concerted effort to adapt agricultural practices, invest in resilient infrastructure, and develop policies that mitigate the inflationary effects of climate change on food prices.
