Impact of Extreme Climate Change on Inflationary expectations and its Influence on SARB Macroeconomic Policy in South Africa

This study investigated the impact of extreme climate change on inflationary expectations and its implications for macroeconomic policy in South Africa over the period 1970 to 2023. Using an Autoregressive Distributed Lag (ARDL) model, the analysis explores both the short run and long run relationships between inflation and key climate and macroeconomic indicators, including temperature anomalies, agricultural output, food production, broad money supply, real interest rates, and carbon dioxide (C02) emissions. The ARDL bounds test confirmed the existence of a long run cointegration relationship among the variables. Empirical findings revealed that rising temperatures and C02 emissions exert significant inflationary pressures in both the short run and long run. Conversely, increases in agricultural output and money supply are associated with disinflationary effects. The error correction term is negative and statistically significant, indicating a rapid adjustment towards equilibrium following short-term shocks. Diagnostic tests confirmed the stability and robustness of the model. These findings underscored the macroeconomic significance of climate change and highlighted the need for the South African Reserve Bank (SARB) to incorporate climate-related risks into its inflation-targeting framework and broader policy formulation.