Climate change risk to price stability: Higher average temperatures increase inflation

Increased average temperatures could drive up annual food inflation by up to 3.2 percentage points per year and overall inflation by up to 1.18 percentage points per year by 2035, shows a new study by the Potsdam Institute for Climate Impact Research PIK and the European Central Bank ECB, to be published in Communications Earth & Environment. This effect persists over 12 months in rich and poor countries alike, making climate change an important economic factor for price stability. In the study, the scientists looked at how climate indices – like high temperatures, extreme rainfall etc – have impacted inflation in historical data. The study shows that the inflation response to average monthly temperature increases is non-linear: 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, according to the study authors.

The researchers also looked at the 2022 summer in Europe where heat and drought had a wide-spread impact on agriculture and the economy: “We estimate that the 2022 summer heat extreme increased food inflation in Europe by about 0.6 percentage points. Future warming projected for 2035 would amplify the impacts of such extremes by up to 50 percent,” explains Maximilian Kotz, PIK scientist and first author of the study. “These effects are very relevant for currency unions with a two percent inflation target such as the Euro zone, and will continue to increase with future global warming.”