Climate Change: Another Driver of Inflation

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Post pandemic, global inflation has soared as consumer demand rebounded while supply tightened amidst labour shortages, global supply chain issues and rising commodity and energy prices triggered by the Ukraine-Russia conflict. While inflation rates appear to be plateauing, a near-term reduction remains unlikely as the war persists and much of the world faces food and energy shortages. Another factor that will continue to impact rates is climate change. Although often overlooked as an economic issue, climate change is a complex phenomenon that is directly and indirectly affecting the global economy. It will likely contribute to volatile inflation rates through multiple ways:

  1. Supply chain disruption — Natural disasters such as flooding, hurricanes, heat waves and droughts are occurring at increased and more damaging rates. These lead to supply chain issues increasing the cost and time to transport goods and dampen overall work productivity
  2. Volatile commodity prices — Natural disasters and rising temperatures will destroy arable land and harvests, limiting food supply and feedstock for many industries. Food supply is already constrained by the Russia-Ukraine conflict, which has likely destroyed at least 2 years of harvests in Ukraine
  3. Rising energy costs and ‘greenflation’ — Further climate-related regulation and the Climate Transition will not only rack up carbon prices but also metal and mineral prices, which are essential to renewable energy technologies
  4. Growing consumer demand — As the planet readapts to climate change, there will be huge demand for construction materials and labour to rebuild and repurpose infrastructure
  5. Mounting insurance premiums — Climate change will continue to trigger big insurance losses, in turn increasing insurance premiums. According to Matic, an insurtech platform, climate risks are expected to add as much as $183bn to annual premiums for property insurance by 2040
  6. Increased company costs — Businesses will incur higher production, maintenance and one-off costs to adhere to increased climate-change regulation and respond to climate change impacts on their business’

The rate and extent that climate change will impact the planet is unknown. What we do know is that it is already pervading our economy and significant changes will be needed for a path to recovery.