The rise in prices experienced by households in recent years is usually associated with wars, energy crises or disruptions in supply chains. However, behind these more visible causes is emerging a factor that is becoming increasingly important: climate change. As temperatures rise and extreme weather events become more frequent, economists are finding that the cost of living is being affected in ways that may prove more permanent than traditional inflationary pressures.
Major disruptions in food prices are nothing new. The COVID-19 pandemic has caused sharp price increases around the world, while similar phenomena have emerged after geopolitical crises or sharp increases in the prices of agricultural commodities. Usually, however, these effects fade over time. In contrast, climate change tends to turn extraordinary shocks into recurring events, creating a lasting source of inflation.
Droughts, prolonged heatwaves, floods and fires destroy crops, reduce yields and make it difficult to transport products. The result is a reduction in supply and a rise in prices. According to research estimates, extreme heat alone could add 0.3 to 1.2 percentage points to global inflation every year from the middle of the next decade. The difference compared to traditional crises is that it is not an isolated episode, but a process that (will) be repeated over and over again as the planet warms.
The first specimens are already visible. In Mexico, tomato prices nearly doubled in one year due to drought, unusual rainfall and diseases favoured by increased humidity. In India, where temperatures reached 47 degrees Celsius in the spring, economists revised upwards their inflation forecasts as expectations of milder rainfall threaten agricultural production.
The rise in food prices is of particular importance, as it directly affects family budgets. In many countries, food accounts for a large proportion of households' monthly expenditure. When consumers see commodity prices rise, they tend to expect similar increases to occur in other sectors of the economy. These expectations are often carried over to wages, business decisions, and ultimately to the entire economic system, boosting headline inflation.
More expensive
At the same time, the effects are not limited to a bad harvest. The most typical example is olive oil in Europe. The historic heatwave of 2022 caused severe damage to the olive groves of Spain, the world's largest producer and exporter. Many trees produced degraded fruit or did not yield at all. Production was reduced by more than 50%, while the problem was repeated the following year. In less than two years, wholesale prices of extra virgin olive oil jumped 165 percent, reaching the highest levels in a decade. It took years for them to start de-escalating.
Climate change does not only raise prices through reduced production. It also makes the production process itself more expensive. Agricultural and food businesses are now investing in heat protection measures, such as special shades, reflective covers for crops and enhanced cooling systems. Costly upgrades are also needed in warehouses, processing plants and transmission networks that were designed for milder climatic conditions. These additional costs are gradually transferred to the final prices paid by consumers, boosting core inflation.
The consequences extend beyond food. Wildfires, floods, and prolonged droughts drive up insurance premiums, water bills, and in some cases rents. Heat waves boost electricity demand due to increased use of air conditioners, putting upward pressure on electricity prices. At the same time, water scarcity can affect hydroelectric projects, nuclear facilities, and major commercial transportation routes, increasing the cost of producing and moving goods.
The effects, however, are not the same in all regions of the planet. Countries that are already in warm climate zones are considered more exposed. Regions of Africa, South America, the Middle East and South Asia are expected to face the strongest inflationary pressures, as further warming can significantly reduce agricultural yields. Many of these economies have limited infrastructure and fewer resources to adapt to the new conditions.
In contrast, some colder countries may benefit. Milder winters can reduce heating costs, while a longer growing season can favour agricultural production. In countries such as Canada or Norway, overall inflationary pressures may prove to be smaller or even deflationary in some cases.
Structural factor
Economists also point out that different extreme weather events affect prices differently. "Dry" events, such as heatwaves and droughts, tend to increase inflation because they limit food production. By contrast, floods and storms can cause damage, but they often slow down economic activity overall and temporarily reduce some consumer spending, making their effects on prices more complex.
Despite the uncertainty that still surrounds long-term forecasts, one thing is becoming increasingly clear: climate change is becoming a new, structural driver of inflation. Governments, central banks and businesses are looking for ways to adapt by investing in more resilient infrastructure and early warning systems. However, as temperatures continue to rise, the cost of this adaptation and the damage from extreme weather events will be reflected more and more often in the supermarket bill and the total cost of living of citizens.
Adaptation – Editing: George D. Pavlopoulos
BloombergOpinion
