Climate change is expensive, and it could add to overall inflation

High temperatures can lead to price spikes and headline inflation, a study finds. Sarah Kaplan of The Washington Post explains.

To state a bit of the obvious, inflation trends are something economists research and follow closely. But what about climate scientists?

Climate change can have a huge impact on global prices, scientists at the European Central Bank and the Potsdam Institute for Climate Impact Research found in a study published in March. Higher temperatures increase food and overall inflation persistently in both higher- and lower-income countries, the scientists found.

Sarah Kaplan, a climate and science reporter at The Washington Post, recently wrote about the effects of climate change on prices. “Marketplace” host Amy Scott talked with Kaplan about her story. Below is an edited transcript of their conversation.

Amy Scott: All right, so let’s talk about olive oil, an essential food item, in my opinion. What’s happened to its price, and how is that related to climate change?

Sarah Kaplan: Yeah, so this year, the global price of olive oil hit an all-time high. And that is very much connected to climate change, because in 2023, Europe experienced an exceptionally hot and dry summer. Studies show those hot conditions were made worse by climate change and cut the region’s olive oil production almost in half. So, it’s just an example of how climate change is contributing to more heat waves, more severe weather globally, and that is having all kinds of ripple effects on our ability to grow food that we need to eat.

Scott: And you talk about how this is only going to get worse. A study showed that rising temperatures could add as much as 1.2 percentage points to annual global inflation by 2035. Talk about that study and what these researchers found.

Kaplan: Yeah, so this was research from the European Central Bank and the Potsdam Institute for Climate Impact Research, and they basically looked at the correlation between high temperatures and prices in a bunch of different countries. And they found that there is this very strong link that when you have higher temperatures, there tend to be price spikes. All of that really can add up to cause not just price spikes for individual items, but inflation for everything that people need to buy.

Scott: And it’s not just food, right? I mean, I’ve done a lot of reporting on the rising cost of homeowners insurance, but you also talk about auto insurance. I imagined businesses will face higher premiums that they will pass on to customers too. How is that affecting the overall cost of living?

Kaplan: The cost of insurance is one of the main contributors to the high inflation that we’ve been seeing in recent years, and experts say that that is very much connected to the increased occurrence of weather disasters. I think one of the things that is really important about climate change is the way that it is creating weather that is not just more extreme, but it’s more unpredictable. You know, insurance is all about sort of weighing the risk of something and trying to price it accordingly. But if you don’t know what the risk is because it keeps changing, that makes the entire endeavor much more difficult.

Scott: So this kind of inflation is not something the Federal Reserve can address by raising interest rates. What can be done? I mean, aside from limiting the damage of climate change, are there adaptations that can help, say, protect crops and the workers who are growing them as extreme heat increases?

Kaplan: Yeah, I mean the adaptation will be specific to whatever product you’re talking about, right? So, for food products, and you know, particularly commodity crops, maybe it is research into more heat and drought tolerant varieties of wheat and corn and rice. I think for insurance, again, it’s going to be more research into understanding what the specific risks of climate change are. And you know, some experts say that there might also need to be real hard discussions about if there are some places where homes are simply too high risk to insure. That is obviously a very thorny subject. What climate change is doing is just again, increasing unpredictability, right? And the kinds of things that people have expected, whether it’s in the price they pay at the grocery store or the ease of getting insurance for their home or their car, is just not going to be the way it used to be. People are going to need to prepare for the unexpected, and probably for higher prices overall.