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10th Aug 2022

Natural disasters drive inflation, study finds

  • The ECB has a responsibility to act on climate change, say financial activists who on Thursday protested the banks bond-buying from fossil-fuel companies (Photo: Greenpeace)
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A research paper from Greenpeace ahead of the European Central Bank's (ECB) governing council press conference on Thursday (9 September) has found that natural disasters can cause market prices to swing - both up and down.

These so-called 'inflationary pressures' will increase in the coming decades, as natural disasters are expected to become more frequent due to climate change.

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In the paper, The Price of Hesitation, the green pressure group, together with the German Institute for Economic Research (DIW) in Berlin and the School of Oriental and African Studies at the University of London, examined how monthly inflation rates developed in disaster-struck areas.

The study was limited to the "physical" risks from climate change. Thus, the effects of climate policy on inflation - like CO2 pricing - were not the subject of the study.

In total, they scrutinised 227 natural catastrophes all over Europe in a period between 1996 and 2021 and analysed how the monthly inflation rates in disaster-struck areas evolved.

What it shows is that climate change and natural disasters have destabilising effects on economies all over Europe.

The effects are different per region and sector. For example, floods can destroy harvests, affecting the regional supply of grain, maize or other crops, therefore driving up food prices.

At the same time, it can ruin peoples homes and means of income, which can depress prices due to lower household demand.

Compared to the direct economic and social upheaval following environmental disasters like the flood in the Ahr valley in Germany, inflationary pressure may seem a somewhat slight or minor issue.

The German government has had to find some €30bn in disaster relief - about one percent of the national GDP - whereas inflation, following even huge natural disasters, has only resulted in temporary, mostly regional, inflation of about 0.37 percent.

Climate change might exacerbate this in the coming decades. But to truly unpack what this means for broader society, co-author Mauricio Vargas told EUobserver we have to look at who is responsible for preventing climate change from getting worse.

Risk prevention principle

"What this study proves is that price stability is threatened by climate change," Vargas said. "And according to its precautionary principle - which means their policy should prevent risk - the bank has the responsibility to act."

That was was reiterated by Christine Lagarde on Thursday (9 September), who said the ECB's task is to "maintain long-term price stability at two percent."

Vargas, along with a group of financial activists, protested at current ECB policies by erecting letters made of ice spelling "Zukunft" [Future] outside the Frankfurt HQ.

"We've been here for a few hours, and the letters are melting rapidly now" he said, in a reference to the rapidly closing time window there is left to act on climate change.

Fossil-fuel companies have access to major reserves because the ECB, one of the EU's most powerful institutions, still buys up bonds issued by the companies. As long as the ECB keeps financing the fossil-fuel industry, they are not aligning with their own principles.

"The ECB should remove fossil-fuel companies from their bond-buying schemes and stop financing businesses that are not in line with the Paris agreement."

In July 2021, the central bank announced its decision to incorporate climate change into its operations. While the bank is moving in the right direction, according to Vargas, they are moving too slow.

"They have discussed these plans for 18 months already. And now they say they need another three years to compile all the data. So we want to show that they have to start acting now."

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