The link between climate change and inflation explained

The document examines the relationship between climate change and inflation, specifically focusing on how extreme temperatures influence price developments. Using panel regressions for 48 advanced and emerging economies, the authors find that hot summers cause immediate increases in food prices, though this often leads to negative inflationary pressure in the medium term. The impact is more pronounced in emerging economies due to the higher weight of food in consumption baskets and lower resilience. The authors argue that these findings provide an empirical basis for central banks to support climate action as part of their primary mandate for price stability.

• Climate change affects price stability through three primary channels: the increased frequency of damaging climatic events (such as windstorms and temperature extremes) impacting food prices; the transition to net zero causing sharp increases in carbon prices which raise energy and production costs; and higher temperatures reducing labour productivity and long-term growth potential.
• Hot summers have the most significant and persistent impact on prices compared to other temperature anomalies. Specifically, a hot summer leads to a contemporaneous increase in food prices by 0.38 percentage points, an effect that grows in subsequent quarters before becoming insignificant after one year.
• The short-term inflationary impact of hot summers is primarily driven by food prices due to supply shortages caused by negative effects on production. This effect is stronger and lasts longer in emerging economies than in advanced economies, partly because food represents a larger share of the consumption basket in emerging markets.
• While extreme temperatures cause short-term price spikes, they can lead to negative inflation dynamics in the medium term, particularly in emerging economies, as agricultural supply disruptions may result in a lasting decrease in demand.
• The relationship between climate change and prices is non-linear. Very hot summers provide clear evidence of negative inflationary pressure over the medium term even for advanced economies, suggesting that increasing frequencies of extreme heat will impact countries that have previously seen limited effects.

APA

Faccia, Parker, & Stracca (2021). The link between climate change and inflation explained. World Economic Forum. https://www.weforum.org/stories/climate-action/covid-19-medium-term-inflation-economy/

Chicago

Faccia, Parker, and Stracca. The link between climate change and inflation explained. World Economic Forum, 2021. https://www.weforum.org/stories/climate-action/covid-19-medium-term-inflation-economy/.

Wikipedia

{{cite report |last1=Faccia |last2=Parker |last3=Stracca |title=The link between climate change and inflation explained |publisher=World Economic Forum |date=22 November 2021 |url=https://www.weforum.org/stories/climate-action/covid-19-medium-term-inflation-economy/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{faccia2021link, author = {Faccia and Parker and Stracca}, title = {{The link between climate change and inflation explained}}, institution = {World Economic Forum}, year = {2021}, month = nov, url = {https://www.weforum.org/stories/climate-action/covid-19-medium-term-inflation-economy/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }