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Climate and Inflation

This March we had a heat wave that damaged the wheat crop and forced the Government of India to ban wheat exports though global demand for the same was increasing. Rains have become uncertain, deviating much more from normal than before, as unseasonal rains and changing monsoon patterns are frequent. Reservoir patterns are also changing alongside rain patterns. With changing rain and reservoir patterns, sowing practices have become unsettled over time. This creates pressure on food crops and food inflation. A study showed that food price rises, particularly, cereal prices are higher in the summer months and the heat wave this summer caused vegetable prices to double in one month. In winter we expect a bumper crop and a reduction in vegetable prices—with the current volatility, a reduction in vegetable prices is usually marginal in winter nowadays. Demand for Energy is also directly proportional to weather changes as fossil fuel demand increases with temperatures and energy prices also increase. Thus the factors determining inflation are many including climate change. Under such circumstances, a change in interest rate may not be the only tool to contain inflation. Its utility lies in limiting expectations because when people understand the intention of the Government, they do not try to jack up margins at every stage thus spiraling a price curve upwards. Admittedly, an interest rate increase has the risk of slowing down GDP growth. Perhaps a solution of integrating climate volatility, food stocks, renewable and non-renewable energy, and interest rates is the best way to combat inflation and inflationary expectations.

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