Like every other advanced economy, over the past three years Australia and New Zealand have experienced higher inflation than at any time in the previous three decades. This has prompted their central banks to hike interest rates more sharply and to higher levels than at any time since just before the global financial crisis of 2008–2009.

For the most part, this surge in inflation has been the result of excess demand fuelled by the monetary and fiscal policy stimulus that central banks and governments implemented in response to the COVID-19 pandemic – stimulus which, with the benefit of hindsight, was too much for too long. It also stems from the lingering effects of the disruptions to supply chains caused by the pandemic, combined with spikes in energy and some food commodity prices prompted by Russia’s invasion of Ukraine. In Australia and New Zealand, another contributing factor has been the mismatch between the supply and demand for housing, resulting from the surge in immigration that followed the re-opening of international borders that had been closed during the pandemic.

The rise of climateflation

But another contributor to the most recent bout of inflation is likely to be a recurring feature of our economic landscape for some time yet. This phenomenon known as ‘climateflation’ refers to an increase in prices as a result of global warming and climate change, significant in breadth and scale to have a discernible impact on overall inflation, and hence on interest rates.

It’s long been established by scientists, and more recently become widely accepted by economists and others, that the more frequent adverse weather events associated with climate change – droughts, fires, storms and floods – will cause periodic, and possibly sustained, disruptions to food supplies, with inevitable consequences for food prices. Research by European Central Bank staff in March 2023 warned that global warming could cause “global increases in annual food and headline inflation of 0.92–3.23 and 0.32–1.18 percentage points per year respectively” by 2035.

Climate change increases costs

Recent experience in Australia and New Zealand bears this out. Over the three years to the June quarter of 2024, food prices rose by 17.6% in Australia and by 19.9% in New Zealand, in each case faster than the 16.8% and 17.6% increases in overall consumer prices, respectively.

It’s also widely acknowledged that more frequent national disasters have resulted, and will continue to result, in more frequent and larger payouts by insurance companies. In turn, they will seek to recoup these losses in the form of higher insurance premiums (or, in some cases, by refusing to insure properties in what they regard as more disaster-prone locations).

Again, Australia’s and New Zealand’s recent experience attests to that. Insurance premiums (as measured in the consumer price index) rose by 34.2% in Australia and by 24.8% in New Zealand over the three years to the June quarter of 2024 – well in excess of the general level of prices.

The clean energy transition

A third dimension of climateflation comes from energy prices. As countries, including Australia and New Zealand, transition away from fossil fuels towards zero emissions sources of energy, prices have become both more volatile and (for other reasons as well), higher on average in recent years than previously. That partly reflects the tendency of coal-fired electricity generating plants to become less reliable as they approach the end of their scheduled working lives, as well as the costs associated with installing new sources of renewable electricity generation and the transmission infrastructure required to connect them to users.

Thus, Australian household energy prices rose by 20.9% over the three years to the June quarter of 2024 (and would have risen by more but for the moderating impact of government rebates). By contrast in New Zealand, which is less reliant on fossil fuels for electricity generation, household energy prices have risen by rather less, 9%, over the same period.

Looking ahead

Beyond these direct influences, there are other channels through which climate change may have effects on inflation in the years ahead. Shortly before assuming her present role, Reserve Bank of Australia governor Michele Bullock warned that “climate change might have important effects on an economy’s capacity to produce goods and services”, for example because “extreme weather and higher temperatures could reduce the level or growth in the capital stock and labour productivity, lowering supply”. In the absence of policy measures to boost supply in other ways, or to bring aggregate demand into line with supply, this would likely result in higher inflation.

Accountants are already playing a greater role in the measurement and reporting of emissions, in response to heightened stakeholder expectations, reenforced by regulation. It’s likely that they will also need to be more attuned to the impact of climate change on the cost pressures faced by their clients and employers.