Global inflation in recent years has driven the prices of food, energy, and basic goods to unprecedented levels, dominating political discussions worldwide, especially in G20 countries. For instance, ahead of this year’s presidential election in the United States, 41% of Americans cited inflation as their top economic concern.
However, the urgency of high inflation risks overshadowing another crisis: global warming. The two are closely intertwined. Extreme weather damages crops, spoils harvests, and disrupts supply chains, leading to higher prices for food and other essential goods. As heatwaves, droughts, and floods become more frequent and severe, these inflationary pressures are intensifying.
Climate-induced inflation hits hardest in regions like Africa and Latin America, where food comprises a significant share of household spending. For example, an extensive drought exacerbated by El Niño raised staple food prices in Malawi, Mozambique, Zambia, and Zimbabwe earlier this year, triggering a hunger crisis. In contrast, households in wealthier countries, which allocate a smaller portion of their income to food, are better insulated.
The economic toll of climate change deepens inequality and threatens economic stability. Shifting weather patterns have driven up the prices of key commodities like oranges in Brazil, cocoa in West Africa, and coffee in Vietnam. A recent study by the Potsdam Institute for Climate Impact Research and the European Central Bank estimates that rising temperatures could increase food inflation by 3.2 percentage points annually and overall inflation by 1.18 percentage points by 2035.
Climate change must be treated as a central economic issue rather than solely an environmental one. Fiscal and monetary authorities should incorporate immediate and long-term climate-related risks into inflation forecasts and economic policies, as they already do with the transition risks of moving to a low-carbon economy.
Some institutions are adapting. The South African Reserve Bank has acknowledged the importance of understanding climate risks, and since 2018, the Central Bank of Costa Rica has integrated global warming's impact into its economic models.
Collaborations between central banks, finance ministries, and climate organizations can help develop solutions to cushion economies from the interconnected shocks of extreme weather, inflation, and food insecurity. For instance, the African Climate Foundation has pioneered Adaptation and Resilience Investment Platforms (ARIPs), which use advanced analytics to guide investment and policy decisions.
Last year, an ARIP helped Malawi recover from Cyclone Freddy, the longest-lasting tropical cyclone ever recorded. This tool enabled policymakers to design lasting solutions to mitigate the economic damage while safeguarding industries and ensuring financial stability.
Regional collaboration is essential. African and Latin American countries could share economic policies tailored to their unique climate vulnerabilities, prioritizing support for exposed communities. The Inter-American Development Bank’s Regional Climate Change Platform for Economy and Finance Ministries offers a valuable blueprint for such efforts.
Globally, greater coordination between climate and economic institutions is crucial. Tools like the European Union’s Carbon Border Adjustment Mechanism underscore the need for careful policy design to minimize adverse effects, such as increased costs for consumers in developing countries.
Brazil, as the host of next year’s BRICS Summit and United Nations Climate Change Conference (COP30), and South Africa, as the current G20 president, have a unique opportunity to lead a global agenda that addresses the twin crises of inflation and climate change.
Failure to act decisively risks worsening inequality, destabilizing economies, and undermining climate goals. However, integrated and equitable policies can mitigate the immediate risks of extreme weather and foster long-term stability and resilience.
As inflation and global temperatures rise, the need for innovative, coordinated solutions has never been more urgent. -PS
Mónica Araya
Saliem Fakir
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