‘Climateflation’: Higher temperatures, more storms, droughts and floods and their economic toll

Irene Lauro

Schroders Environmental Economist Irene Lauro examines the implications of a warmer world as recent floods in Brazil and Europe, droughts in America, extreme heat across Africa and Asia provide evidence that the economic impact of climate change can no longer be ignored.

According to the latest report released by the World Meteorological Organization (WMO), there have been significant and alarming developments in various climate indicators. The report highlights that numerous records have been broken in relation to greenhouse gas levels, surface temperatures, ocean heat and acidification, sea level rise, Antarctic Sea ice cover, and glacier retreat.

2023 was the warmest year on record and the upward trend has persisted into 2024, with May marking the twelfth consecutive month of record warmth based on historical data. Global warming is now above the 1.5 °C target agreed in Paris in 2015. At the regional level, Europe has been warming twice as fast as the global average, becoming the fastest-warming continent, registering a record number of days with extreme heat stress in 2023.

Global mean temperature on the rise

In our view, the occurrence of monthly breaches of 1.5°C does not imply that the world has failed to meet the temperature target set by the Paris Agreement. The agreement's objective is to limit long-term temperature increases over a period of decades, rather than focusing on short-term monthly fluctuations. However, levels of greenhouse gases continue to climb at steep rates, meaning that a more persistent increase in global warming is likely, highlighting how urgent the need to prepare for a warmer world is. Until we reach net zero, the climate will continue to warm, breaking records and producing even more extreme weather events.

Global warming to intensify pressures on inflation

Changes in temperature and rainfall patterns severely impact agricultural output, with important implications for global food supply and prices. A recent empirical study by the European Central Bank shows that higher temperatures increase global food and headline inflation persistently over 12 months. This means that the initial spike in inflation is not offset by a decline in prices over the following year. The study finds that persistent upward pressures on annual food inflation of 1-3 percentage points per year as a result of higher projected temperatures could occur from 2035. These impacts vary across regions with generally larger effects expected in the global south.

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