Climate change will speed up inflation in next decade, says ECB

In a report published this week, analysts predicted rising temperatures mean annual inflation will be between 0.32 to 1.18 percentage points higher by 2035. That will create problems for consumers as well as policy makers, with the ECB’s target to keep inflation at 2%.

“Climate change poses risks to price stability by having an upward impact on inflation,” said the researchers Maximilian Kotz, Friderike Kuik, Eliza Lis and Christiane Nickel. That would “place global incomes under pressure from rising prices and could impact inflation expectations, thereby requiring monetary policy to react.”

Warmer temperatures will boost annual food inflation by between 0.92 and a hefty 3.23 percentage points, the research paper found. While the so-called global south, where temperatures are hotter, should face more of the pain, it will also mean particular challenges for economic blocs such as the European Union. That’s because climate variations are likely to widen differences in prices within the region.

The research, which assumes there won’t be new technologies that will help with the need for “historically unprecedented” climate adaptation, comes at a time of increased interest from governments and investors in how climate change is affecting everything.Analysts at Barclays Plc said in a Tuesday report that the world’s transformation toward a zero-carbon economy will lead to generally higher inflation and also a rising real neutral interest rate over the next decade.“At least in the initial five to 10 years it would seem most realistic that the negative supply shock pushing inflation higher dominates and that central banks will not fully offset it,” Barclays analysts including Christian Keller wrote. “Pricing of longer term real rates and inflation (i.e. break evens) does not seem to reflect this.”

A market measure predicting European inflation in the second half of the next decade is currently at around 2.5%, still above the ECB’s target. A surge in food costs in the past year has helped drive unprecedented inflation and interest-rate hikes in the euro area.

The ECB researchers also said that higher temperatures will change the seasonality of inflation.

“The chaotic nature of temperature anomalies implies short-term, more rapid prices rises from exceptionally hot summers such as in Europe in 2022,” the paper said. “Such additional shocks to prices — happening at unpredictable intervals but with increasing intensity — would pose additional challenges to monetary policy.”