Climate change and its implications for prices and inflation

As inflation in the euro area and beyond falls from its multi-decade highs of 2022, the focus is now turning to the potentially inflationary impact of ongoing rapid structural transformation. Climate change is transforming the planet in ways that have become ever more disruptive and life-threatening in many parts of the world. As global greenhouse gas emissions continue to grow, amid slow and insufficient mitigation efforts, its impact will become even stronger in the years ahead. This article discusses how prices and inflation will be affected by climate change and efforts to mitigate it and adapt to it. It highlights how relative price adjustments will play a key role in this process. These adjustments may be due to climate-induced shocks to productions factors or preferences, or to some of the policy instruments used. Both climate change and mitigation measures are expected to impact a wide array of prices, particularly food and energy prices. While there is substantial uncertainty about orders of magnitude, inflation is expected to become more volatile and subject to upward pressure. Inflation volatility over time will largely depend on adaptation and mitigation efforts. Overall, inflation is likely to become harder to interpret and forecast. This may in turn affect inflation expectations and create more uncertainty in macroeconomic policymaking