Climate change is increasingly contributing to higher food prices globally, with impacts seen from olives in southern Europe to cocoa in west Africa. Adam Davis of Farrer Capital notes that commodities like wheat are up 17%, palm oil 23%, sugar 9%, and pork 21% this year due to climate-related issues. The Energy and Climate Intelligence Unit estimates that climate change was responsible for one-third of UK food price increases in 2023, while HSBC's Frederic Neumann highlights that a sequence of abnormal weather events is creating a "permanent impact on the ability to supply food."
This sustained pressure is leading food price rises, once considered temporary, to become a persistent source of inflation. A study by the European Central Bank and the Potsdam Institute for Climate Impact Research projects that annual food inflation rates could rise by up to 3.2 percentage points per year within the next decade, contributing to an overall annual inflation increase of up to 1.18 percentage points by 2035. Developing economies, where food constitutes a larger share of household expenditures (up to 50% of the CPI), are expected to be the worst affected, as higher food prices reduce discretionary spending and stifle broader economic growth.
The growing and sustained inflationary impact of climate change on food prices is sparking a debate among central banks regarding their monetary policy responses. Traditionally, central banks often exclude volatile food and energy prices from core inflation measures. However, economists like David Barmes of the London School of Economics argue that treating these climate-induced food price spikes as temporary is no longer a useful approach. Frederic Neumann anticipates that more frequent disruptions to food supply will compel central banks to react, leading to more volatile and potentially higher interest rates over time, thereby complicating their efforts to manage inflation.
