BoK Report: Extreme Weather Events Drive Persistent Inflation
Inflationary Pressure Lasts at Least Two Years
Precipitation Shocks Raise Prices by 0.03% Points Over a Year
"Need to Expand Climate Adaptation Investment and Strengthen Monitoring"
According to a recent analysis, even a 1-degree Celsius increase in the maximum temperature above the seasonal average can raise the consumer price index by nearly 0.06 percentage points over a year, with inflationary pressures persisting for more than two years. The study suggests that if such extreme weather events continue, their impact will become structurally significant and prolonged after 2050. The Bank of Korea has recommended increasing investment in climate change adaptation and strengthening the monitoring of weather shocks to enable a more proactive response.
According to the Bank of Korea's report, "BoK Issue Note: The Impact of Extreme Weather Events on Inflation," released on September 8, when the daily maximum temperature in a given month rises by 1 degree Celsius above the 30-year monthly average, the inflationary pressure persists for more than 24 months, raising the consumer price index by 0.057 percentage points over three months and by 0.055 percentage points over a year.
When monthly daily maximum precipitation exceeds the historical average by 10mm, the resulting precipitation shock maintains inflationary pressure for 15 months, increasing the consumer price index by 0.039 percentage points over three months and by 0.033 percentage points over a year.
Yeon Jeongin, head of the Sustainable Growth Division at the Bank of Korea, stated, "What is noteworthy is that the inflationary pressure caused by heat shocks remains high and persistent over a long period." He explained, "Given the intensifying heat waves due to global warming, these phenomena not only cause temporary disturbances in prices but also act as structural inflationary factors through changes in consumer demand patterns and producer price adjustments in response to high temperatures."
In particular, the analysis found that the more intense the weather shock, the more sharply its ripple effects on inflation are amplified.
For example, under normal heat conditions, a 1-degree Celsius increase in temperature raised the annual domestic consumer price index by an average of 0.043 percentage points. In contrast, under extreme heat conditions (where the gap between the monthly average and the daily maximum temperature is in the top 5% historically), the increase was 0.11 percentage points, more than 2.5 times higher. Considering that extreme heat in Korea has risen by 4.9 degrees Celsius above the average, the actual inflationary pressure can be estimated at about 0.56 percentage points.
In the case of precipitation shocks, in the top 5% of extreme precipitation events, each 10mm increase in precipitation raised the annual inflation rate by an average of 0.054 percentage points, compared to only 0.024 percentage points under normal precipitation conditions. Yeon emphasized, "We confirmed that when extreme weather shocks exceed a certain threshold, their impact on inflation changes both quantitatively and qualitatively. If we do not account for the nonlinearity of weather shocks, we may underestimate their effects on inflation."
By reflecting the Korea Meteorological Administration's climate forecasts to estimate future inflation trends, the report found that inflationary pressure from weather shocks is likely to continue expanding. In particular, if efforts to address climate change are reduced or delayed and global warming accelerates, the inflationary pressure from heat shocks between 2051 and 2100 (0.73 to 0.97 percentage points) could double compared to current levels (0.32 to 0.51 percentage points). For precipitation shocks, inflationary pressure could reach 0.47 to 0.71 percentage points between 2076 and 2100, about 1.5 times higher than now.
Yeon noted, "If extreme weather events worsen due to accelerating climate change, the inflationary impact of weather shocks could pose a significant threat to medium- and long-term price stability. It is necessary to precisely analyze and monitor the transmission paths and time lags through which weather shocks affect the supply and demand systems of various goods and services."
He also recommended enhancing productivity and supply stability in climate-vulnerable sectors such as agriculture, livestock, and fisheries, and expanding investment in climate adaptation infrastructure, including disaster response systems. He pointed out the need to establish insurance and financial safety nets as well. The report concluded, "As extreme weather events become more commonplace, it is essential to assess their impact on the real economy, financial markets, and monetary policy operations from a long-term perspective, and to strengthen research for the development of effective policy responses."
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