“Climate change is seriously affecting the economy.” That is the first warning that three experts from the European Central Bank (ECB) issued in a recent report. The extreme temperatures and their many effects (on agriculture, livestock, productivity, etc.) also end up being noticed in prices. And, as this analysis shows, Spain is (and will likely continue to be) one of the most affected powers in Europe. Or, rather, the citizens of this country are among the most affected on the Old Continent by the continuous change in climate patterns around the world.
One of the most repeated data points of the United Nations (UN) about climate change is that the average temperature of our planet is currently 1.1 °C (degrees Celsius) higher than at the end of the 19th century, before the Industrial Revolution. “Humans are responsible for the global warming of the last 200 years” and the “irreversible” damage to the Earth, says the UN, based on studies carried out by a group involved in the United Nations, the Intergovernmental Group of Experts on Climate Change (IPCC).
Global warming does not only mean higher temperatures around the planet, as experienced in many countries in recent summers. It also means water scarcity and extreme droughts, rising sea levels, melting of the Arctic and Antarctic poles, and deadly storms (with floods, stronger winds, etc.). Therefore, “people are affected by climate change in different ways,” the UN insists. And this means, in turn, that the economy is damaged.
“There is increasing evidence that higher temperatures boost economic output through reduced agricultural production, reduced labor productivity, increased energy demand, harmful effects on human health, and disruption of supply chains,” said Friderike Kuik, Matteo Ciccarelli, and Catalina Martínez Hernández, ECB economists, in an analysis they published on Tuesday.
Hot summers raise temperatures and inflation
The research on how climate change affects the economy is recent, also for the ECB, but the central bank’s weight is increasing given that its main task is to maintain the stability of the price. Therefore, it is key for monetary entities to understand the relationship between prices (their increase or inflation) and temperature differences.
Therefore, Ciccarelli, Martínez, and Kuik intend to contribute their grain of sand to their study. “Our conclusions have implications for price stability and the work of central banks: as climate change brings more frequent and severe climate shocks, the volatility and variability of inflation may increase,” said three economists.
His research focuses on the four biggest powers in the group of countries that have the euro as their currency (eurozone): Germany, France, Italy, and Spain. The main conclusion is that “very hot summers will become more frequent and severe, so inflation can be expected to rise in the future.”
“Inflation is expected to increase in the future…”
In this sense, ECB experts revealed that if the climate shock occurs during the summer, high temperatures will cause a “significant” increase in unprocessed foods in four countries.
“If the average monthly temperature rises by 1 °C, inflation of unprocessed foods will rise between 0.1 and 0.2 percentage points in the first year,” Ards says afterward. The German economy suffered the least from this effect, while in the Spanish, Italian, and French economies, it was more “persistent.”
But why did this happen? According to the three authors of the study, this is because the high temperature causes a decrease in agricultural production and labor, and the fresh food supply chain is hindered.
In addition, hot summer times mean that in France and Spain, there is also an increase in the price of unprocessed foods. “This may indicate a delay in the transmission of the increase in basic food prices to processed food prices,” said Martínez, Kuik, and Ciccarelli.
What if the climate shock happens at another time? “The response (of food prices) to a shock that occurs in winter or spring is not very important and may, on the contrary, cause inflation to fall,” they replied.
More than food
The increase in food prices is reflected in the consumer price index (CPI), or general inflation rate. However, the variation in the CPI due to the indirect influence of the climate is not the same in the four powers of the euro; ECB experts emphasize that the changes are “asymmetric and heterogeneous.”
“In summer, inflation systematically responds to thermal shocks with an increase in the first months after the disturbance,” and the effect is “significant” when high temperatures occur in Italy and Spain. “However, overall inflation in the euro area may decrease inversely if thermal shocks occur at other times of the year, depending on where and when” climate shocks occur, they pointed out.
Likewise, the effect of weather on prices is not only noticeable in food. Scorching summers also have an impact on inflation services, which the European Central Bank has been paying special attention to for months when making its decisions on interest rates (which have risen steadily since July of last year). Of course, the blow to the tertiary sector is less than that to food. “The increase in inflation in services may be due to a change in food prices (commodities), which, in turn, will affect the prices of food services (for example, restaurants, cafes, canteens, and fast food),” the study authors said. clarify.
As if this were not enough, climate change can also make the sectors of leisure and tourism services “equally vulnerable”, which in the case of Spain are fundamental pillars for the economy (especially tourism). But why? “If the temperature exceeds a critical threshold, negative effects will occur on the supply of work and productivity,” which will directly affect these sectors, said Kuik, Ciccarelli, and Martínez.