Monetary tools can’t tame climateflation

‘The time has come for us to consider what kind of structural solutions we really need to tackle the climate challenge.’

Ha Hyun-ockThe author is an editorial writer of the JoongAng Ilbo. The Bank of Korea (BOK) met an unexpected leviathan in its Sisyphean battle against inflation. This ruthless titan is called “climateflation,” or soaring food and energy prices caused by climate change such as scorching summer temperatures, frequent droughts and floods. This poses a serious challenge for the central bank — the inflation fighter — who places a top priority on stabilizing prices. In a press conference held shortly after a Monetary Policy Board meeting in April, BOK Gov. Rhee Chang-yong admitted his dilemma. “The most baffling development for us is the increased prices of agricultural produce from climate change,” he said. At the time, the skyrocketing prices of fruits — particularly those of apples — added to the inflationary pressure on the economy. Under such circumstances, it’s difficult for the central bank to lower interest rates to help revitalize the economy.

Abnormal weather conditions are already upsetting prices across the board. According to the National Centers for Environmental Information (NCEI) under the National Oceanic and Atmospheric Administration in the United States, Earth’s temperature from January to April this year was the highest in the past 175 years. The sizzling heat and drought are pushing up farm produce prices, as seen in the “chocolateflation” triggered by the extreme drought across West Africa, which accounts for 80 percent of global supplies. Cocoa prices are again approaching $10,000 per ton following April. A major culprit for the price hike is El Niño — unusually warm ocean temperatures along the equator. The International Cocoa Organization (ICCO) expects global cocoa production to decrease by 11 percent this year compared to the two years prior.

Coffee prices are also unstable. Prices of Robusta beans, mostly used for instant coffee, rose more than 30 percent over the past year from the El Niño-spiked extreme drought in Vietnam, the largest producer of Robusta accounting for 36.5 percent of global supplies. Citigroup anticipated that Arabica — expensive coffee beans — will ascend approximately 30 percent in the coming months. Concerns about “sugarflation” are also deepening. Prices of sugar are expected to jump 20 percent this year due to the decreased raw sugar output from India and Thailand because of droughts and a lack of rainfall in Brazil, the largest raw sugar producer in the world.

Olive prices are no different. According to the International Monetary Fund (IMF), olive prices reached $10,088 per ton in the first quarter — a whopping 80 percent jump from the same quarter in 2023 — and broke the threshold of $10,000 for the first time on a quarterly basis. The 44.7 percent increase in olive prices in April resulted from an extreme drought in Spain that covers 40 percent of global olive supplies.

Humanity must brace for a prolonged uphill battle against climateflation. Bloomberg warned about the hottest year in the Northern Hemisphere this summer. The NCEI forecast that this summer will be one of the five hottest summers on record — with a 61 percent chance of it being even more sweltering than the summer of 2023, which was the warmest in the past two millennia. Jennifer Francis, a senior scientist at Woodwell Climate Research Center, cautioned against lowering guards against an extreme heatwave sweeping the Midwestern United States and Europe this summer.

Compounding the problem is the expected return this year of La Niña — unusually cold ocean temperatures along the equator, as opposed to El Niño. It can bring about droughts for the farm belts of the Southwestern United States, Argentina and Brazil. The visit of the climate monster also means that more tropical storms and hurricanes will be formed in the Atlantic and more breadbaskets be flooded in China. If La Niña brings a terrible cold wave to the Northern Hemisphere in winter, it can have a devastating impact on the production of wheat, corn and soybeans. As much worrisome as the low crop yields and their soaring prices are energy price hikes — up to “60 percent higher in Europe and Asia than before,” according to Citigroup’s projection.

Choi Jin-young, a commodity analyst at Daishin Securities, pointed out that if the cold wave triggered by La Niña in the Northern Hemisphere raises the demand for heating and lifts natural gas prices, it can fan oil prices during winter. If natural gas prices go up, the prices of nitrogen fertilizers using natural gas will also jump. As nitrogen fertilizers take up 58 percent of the entire fertilizer market, the increase in energy prices will naturally affect grain prices.

Climateflation can disrupt global supply chains and intensify the effect of inflation. If the productivity of such climate-sensitive categories falls and supply decreases, it fuels inflationary pressure. Climate change can also disturb global distribution networks, as clearly seen in last year’s strict restrictions on container ships that can pass through the Panama Canal after its water level sharply fell from a severe drought. The IMF underscored the need to take the climate factor into account as it directly affects global supply chains, inflation and economic growth.

The effects of weather anomalies are clear. According to a research by the Potsdam Institute for Climate Impact Research, global warming is expected to raise food prices by maximum 3.2 percentage points —and overall prices by 1.2 percentage points — annually. The German think tank reached the conclusion after analyzing monthly consumer price indices and weather data from 121 countries over the past 30 years. The institute estimates the global damage from climate change will reach $19 trillion to $59 trillion annually.

An analysis on climate change’s effect on the Korean economy has just been released. A recent BOK report projected a 0.6-to-1.1 percent increase in prices of domestic farm produce — and a 0.3-to-0.6 percent increase for overall prices — by 2040 based on the latest climate change scenarios by the Network for Greening the Financial System, a group of central banks and supervisors dedicated to assessing climate risks. The BOK anticipated that climate change will have an even bigger impact on the country’s inflation given other significant effects from the increases in international commodity prices.

To stabilize prices, the government must minimize the effect of climateflation. But the problem is that the central bank’s monetary policy primarily based on changing interest rates is not so effective in fighting the novel inflation. A recent IMF report pointed out that even if a central bank raises its base rate by 1 percentage point, it only lowers inflation rate by 0.6 percentage points over the next two years if a country suffers low precipitation and high temperature.

The Korea Development Institute has come up with similar research results: Responding to soaring food prices from climate shocks with monetary tools will not be effective due to such price hikes’ limited impact on core inflation and mid-term price movements — despite their short-term impact on inflation. The state-run think tank stressed the need for structural solutions to ensure more stable supply of farm produce rather than resorting to monetary tools.

In a press briefing last week, the BOK governor said, “We can fight inflation with monetary tools, but when it comes to agricultural produce with high “price volatility,” we need to enhance productivity, secure more of their supplies, and diversify import routes.” He then added, “The time has come for us to consider what kind of structural solutions we really need to tackle the climate challenge.”