Impacts of climate change on inflation: An analysis based on long and short term effects and pass-through mechanisms

Abstract

Climate change is becoming an important factor affecting inflation. This study uses data from 101 countries between 2006 and 2019, employing the GMM method to analyze the impact of climate change on inflation rates, with the climate risk index published by Germanwatch as the primary explanatory variable and the inflation rate as the dependent variable. The results show that climate change can significantly increase the inflation rate in the short term, but not in the long term. Climate change is more likely to increase the price level in low-income countries than in developed countries. Further research shows that the central bank's interest rate policy and food price play mediating roles in climate change affecting inflation. Specifically, climate risk impacts the economy, and the central bank reduces the interest rate to stimulate the economy, causing inflation. Climate change also impacts food supplies, and rising food prices drives inflation. Therefore, the policy implication of this paper is that attention should be given to the short-term impact of climate change on inflation. Additionally, central banks should avoid significant reductions in interest rates in the short term and take measures to curb rising food prices to address climate change.