From drought to food inflation

The year 2022 has seen food inflation rise substantially. This was mostly the result of the Russian invasion of Ukraine with the resulting price spikes for energy and fertilisers and the reduction in grain exports from Ukraine. But to make things worse, the sweltering and dry summer put pressure on European food producers.

It is hard to disentangle the two effects in 2022, which is why I am thankful to Richhild Moessner from the Bank for International Settlement who published a paper that tried to estimate the impact of precipitation on food inflation. That study showed that, as you might have guessed, both too much rain and too little rain are bad for harvests and lead to rising food inflation. Using data from 34 developed countries from 1985 to 2010 shows that food inflation increases by 1 percentage point if precipitation declines by 60% from long-term averages or rises by some 60% above these averages. The effect becomes more potent if the economy already suffers high inflation or if the economy is overheating. We don’t have annual data for 2022, yet, but based on what we know already, I would guess that food inflation was accelerated by some 0.5 to 1 percentage points in the second half of this year due to the drought in Europe.

Impact of precipitation on food inflation

Source: Moessner (2022). Note: Horizontal axis shows the annual precipitation in dm adjusted for population density. Long-term average precipitation density is 10dm/sq.m.

That is not a lot, but it shows that as climate change increases the instances of extreme weather events like droughts and floods, we have to expect a periodic spike in food inflation. We have seen these effects before, mostly during the dry years in the 1950s as well as more recently in 2003 and 2010. It seems likely that we are heading in this direction again.

Annual precipitation anomalies in Europe

Source: Copernicus Climate Change Service