Climate Change Threatens Food Prices and Global Economy

Central banks are facing a new challenge in managing inflation - the impact of climate change on food prices and supply chains. Heatwaves, droughts, and floods are becoming more frequent and intense, causing widespread damage to crops and disrupting transportation networks.

The European Central Bank has found that heatwaves can add 0.4-0.7 percentage points to eurozone unprocessed food inflation over a year. Researchers at the Barcelona Supercomputing Center estimate that higher temperatures could add up to 3.2 percentage points per year to global food inflation by 2035.

The ECB is developing tools to track and predict the impact of climate-related shocks on food prices, including a Random Forest model that predicts unprocessed food inflation six months ahead. The Network for Greening the Financial System (NGFS) has also developed a framework for policymakers to address climate-related economic shocks.