Food, transport, rent and house price inflation are being driven up by extreme climate disruption around the world

The global warming crisis is now directly impacting on consumers’ hip pockets, the Reserve Bank says.

It points to severe droughts in Brazil over the past two years that have been boosting grain prices, and electricity rationing for Chinese manufacturers, due to high coal prices in extreme weather.

The Bank warns there is a risk that high inflation will become embedded in wage- and price-setting behaviour. Contributing factors include supply-chain disruptions, rising house prices, and the direct effects of climate-change-related disruptions and government climate transition policies.

The physical impacts of climate change, and the policies aimed at minimising climate change and its effects, are also forecast to impact on employment.

Reserve Bank Governor Adrian Orr told media it was important to talk about the specific impacts of climate change. “Most of the talk is about financial stability and the challenges and opportunities for the financial institutions we regulate,” he said.

“But we also have to signal to the broader market that relative prices can be very noisy as we go through increased climate change volatility, but also transition into new forms of energy and new ways of doing business. And of course, there are policy shocks that come about.”

Those physical impacts are the direct impacts of climate change, like variations in growing conditions for crops, and more frequent and severe weather events. These are likely to become more significant over time, this week’s Reserve Bank monetary policy statement says.

The transition impacts are the outcomes of actions to limit climate change and its effects, that may be the result of government policy changes, consumer preferences for ‘green’ products, or pressure from investors and the public more generally. Government intervention is accelerating globally, with New Zealand recently making a commitment to reduce net greenhouse gas emissions by 50 percent by 2030.

“These impacts could result from reductions in global food production due to more frequent extreme weather events such as droughts or floods, and from disruptions to renewable energy generation.”
– Reserve Bank

The impacts on consumer prices will vary in both magnitude and direction over time, the statement says.

“The clearest potential impacts are on consumer prices for housing and household utilities, food and transport,” it warns. “These components account for a significant share of consumer spending in New Zealand. They are particularly vulnerable to physical impacts and are exposed to transition impacts due to their greenhouse gas emissions.”

The physical impacts of climate change will be passed through to consumer prices by increasing the scarcity and reducing the productivity of certain resources in the near term. These impacts could result from reductions in global food production due to more frequent extreme weather events such as droughts or floods, and from disruptions to renewable energy generation.

And policies like the Emissions Trading Scheme, which is designed to progressively increase the cost of high-emissions production, will affect production costs in high-emissions industries – especially the transport sector. “The relative cost of emissions from fossil-fuel based transport is likely to steadily rise, as governments encourage a shift to low emissions transport methods. Concurrently, this should help low-emissions production become cheaper, and encourage investment in new technology that could further reduce costs in low-emissions industries.”

Volatility in global food and energy prices typically flows through to the prices paid by New Zealand consumers. Source: FAO, Reuters, Stats NZ, Reserve Bank

In the next one to five years, climate change-related price movements could be large in energy, food and transportation. This volatility in global food and energy prices typically flows through to the prices paid by New Zealand consumers.

“Markets for some goods have been affected by physical disruptions to global production and distribution,” the bank says. “Severe droughts in Brazil over the past two years have been boosting grain prices.

“China temporarily introduced electricity rationing due to high coal prices and difficulties meeting emissions goals, as manufacturing-related electricity demand increased and extreme weather boosted demand for heating and cooling.”

Over the next five to 10 years, the impacts of climate change on consumer prices are forecast to broaden. Tightening domestic carbon policy will drive up prices for fuel and high-emissions industries like transport.

“Home ownership costs, such as insurance and council rates, are already rising in response to the actual and expected physical risks presented by rising sea levels and more extreme weather events.

“Housing costs are also likely to increase if building standards increasingly encourage energy-efficient buildings, which are more expensive. Over time, higher home ownership costs may also be reflected in rent prices.”

In the longer term, the impact of climate change on inflation is less clear. Consumption patterns might change, and new technologies might be developed. And some areas will experience changes in climate that are beneficial to food production.

The Reserve Bank says it is working to better understand the macroeconomic impacts of climate change, and it is part of a group of more than 100 central banks and prudential regulators collaborating on modelling work as part of the Network of Central Banks and Supervisors for Greening the Financial System.

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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