Climate change does not leave the inflation rate unaffected.

Scientists on behalf of the environmental protection organization Greenpeace have now for the first time demonstrated a significant connection between extreme weather events and the development of the general price level for the euro area.

However, the effects of the individual events are comparatively minor.

This emerges from the study “The Price of Hesitation”, which Greenpeace presented on Wednesday together with the German Institute for Economic Research (DIW) in Berlin and the SOAS University of London.

This time it's not about expensive gasoline

Christian Siedenbiedel

Editor in business.

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The study was limited to “physical” risks from climate change such as increased storms and floods.

The “transitory” risks, such as the consequences of climate policy such as CO2 pricing or the coal phase-out, which may have an even stronger effect on inflation, were not the subject of this empirical study.

Extreme weather events and natural disasters from the period between 1996 and 2021 were considered. For this purpose, data on events and damage from the EM-DAT database of the Center for Research on the Epidemiology of Disasters at the University of Leuven were used.

For almost 25 years there have been 227 natural disasters in today's euro area.

These were compared with the development of the Harmonized Index of Consumer Prices (HICP) from the European statistical agency Eurostat.

It was examined how the monthly inflation rates developed after the events, and a differentiation was made again according to individual countries and according to the prices for certain product groups.

Statistically, the attempt was made to isolate the effects of extreme events from other factors that affect the inflation rate.

Effects on harvest or transport routes

According to the study, the result was a significant correlation between extreme weather events and the change in the inflation rate.

However, the damage had to be quite high for the consequences to be clearly noticeable.

In the event of damage of one percent of the gross domestic product - which corresponds in the order of magnitude to the volume of the construction fund for the damage caused by the floods in the Ahr Valley - inflation would rise by an annualized 0.376 percentage points, explained Greenpeace.

If one assumes that climate change makes extreme weather events more frequent, this phenomenon will gain in importance.

According to the scientists, there are two mechanisms by which extreme weather events affect inflation - which can work in opposite directions.

On the one hand, storms could, for example, destroy the harvest and thus drive up the price of grain.

Floods and storms can also make transport routes such as roads and railways impassable and thus increase transport costs.

On the other hand, natural disasters can also destroy the fortunes of people in the affected regions, their houses and other possessions, as happened most recently with the flood in the Ahr valley.

If households then have less money and insurance companies and the state do not step in on a large scale, this can then put a strain on household demand - and rather lower the inflation rate.

Growing prices for food

According to the study, however, the price-driving effects of extreme weather events dominated the euro area as a whole in the almost 25 years under review.

There were differences when looking at individual countries.

In France and Spain, for example, prices rose above average after the natural disasters.

Germany, on the other hand, was the only country in which prices even fell on average as a result of such extreme weather events.

Such divergences in development in the various euro countries could pose challenges for European monetary policy in the future, it said.

There were also anomalies in individual product categories: for example, the HICP sub-index “food and beverages” showed comparatively strong price effects on extreme weather events.

Greenpeace advocates that the European Central Bank should take climate change into account more in its policy. The most recently presented plans by the central bank for “greening” are a step in the right direction, but they are not enough. In particular, the schedule is not ambitious enough. The study is intended to show that climate change is also affecting the central bank's core business, price stability.