In a report released this week, analysts predict rising temperatures mean annual inflation will be between 0.32 and 1.18 percentage points higher by 2035. That will generate problem for consumers as well as policymakers, with the ECB’s goal of keeping inflation at 2%.
“Climate change poses risks to price stability by affecting inflation,” said researchers Maximilian Kotz, Frideike Kuik, Eliza Lis and Christiane Nickel. That would “put global earnings under pressure due to higher prices and could impact inflation expectations, thus requiring monetary policy to react.”
The research paper found that warmer temperatures would boost annual food inflation by between 0.92 and 3.23 percentage points. While the so-called global south, where temperatures are hotter, will face more difficulties, it also means special challenges for economic blocs such as european union. That’s because climate changes are likely to widen regional price differences.
The study assumes no new technology will help meet the “historically unprecedented” need for climate adaptation, which comes at a time when governments and investors are increasingly concerned about climate change. How climate change is affecting everything. Analysts at barclays joint stock company The world’s transition to a zero-carbon economy will lead to generally higher inflation and a rise in real neutral interest rates over the next decade, said in a report Tuesday. “For the first 5 to 10 years at least, that seems most realistic a negative supply shock pushing inflation higher to dominate and central banks won’t fully compensate for it,” analysts said. Barclays’ product includes Christian Keller Written. “The pricing of long-term real interest rates and inflation (i.e. breakeven) does not appear to reflect this.”
A market gauge predicts European inflation for the second half of the next decade is currently around 2.5%, still well above the ECB’s target. Soaring food prices over the past year have fueled inflation and an unprecedented rise in interest rates in the euro area.
The ECB researchers also said that higher temperatures will change the seasonality of inflation.
“The turbulent nature of the temperature anomaly implies faster, shorter-term price increases from particularly hot summers like those in Europe in 2022,” the paper said. “Such additional shocks to prices – occurring at unpredictable intervals but with increasing intensity – will pose additional challenges to monetary policy.”