Analysis has emerged indicating that extreme high temperatures will raise domestic consumer prices by 0.055 percentage points (p) over two years. Heavy rainfall was found to increase prices by 0.033%p over 15 months.
The Bank of Korea announced on the 8th the release of its 'BoK Issue Note: The Impact of Extreme Weather Events on Inflation - Assessing Persistence and Non-Linearity'.
This result was derived by tracking the intensification of extreme weather events across 16 metropolitan and special cities and provinces in Korea from January 1990 to March this year, along with the changes in the consumer price index for these regions. The Bank of Korea defined extreme high temperatures and heavy rainfall as instances where the monthly maximum temperature or maximum daily rainfall deviated from the past monthly average by more than 5%.
Director Yeon Jeong-in of the Bank of Korea's Sustainable Growth Division noted, 'Both high-temperature and precipitation shocks have been confirmed to have significant long-term effects on the consumer price inflation rate.'
According to the Bank of Korea, temperature shocks and precipitation shocks elevated the inflation rate compared to the same month of the previous year by an average of 0.057%p and 0.039%p, respectively, during the three months following their occurrence.
The impact over one year showed that temperature shocks contributed 0.055%p and precipitation shocks contributed 0.033%p. The inflationary pressure from temperature shocks persisted for over 24 months, while the pressure from precipitation shocks dissipated after 15 months.
Director Yeon explained, 'The long-term intensification trend of extreme high-temperature phenomena is prolonging the effects of temperature shocks.'
It has been shown that in extreme weather shock scenarios beyond a certain level, the inflation rate increases significantly. In the general warm temperature range below the top 5%, the average inflationary pressure was 0.043%p for the year, but this expanded to 0.11%p in the extreme range above the top 5%. Similarly, the inflationary pressure in the general precipitation range was 0.024%p, while it grew to 0.054% in the extreme precipitation range.
Director Yeon added, 'If the non-linear impacts of extreme weather shocks are not considered, there is a possibility of underestimating the effects of extreme heat or heavy rainfall on prices.'
Looking at it by item, the prices of agricultural and marine products were more significantly affected by abnormal weather than service prices. Both temperature shocks and precipitation shocks increased the product price inflation rates by 0.043%p and 0.061%p, respectively, over the year. The impact of temperature shocks lasted over 24 months, which was longer than that of precipitation shocks (16 months).
Industrial products did not show significant differences in long-term and short-term responses to temperature and precipitation shocks, while prices for agricultural and marine products saw a sharp rise in short-term price pressure.
The inflation rate of service prices was recorded as 0.066%p higher over the year due to temperature shocks. However, precipitation shocks showed no significant changes and resulted in a decline of 0.032%p over a long period.
The Bank of Korea warned that if climate response efforts are reduced or delayed, inflationary pressures from extreme weather phenomena could surge dramatically after 2050, stating, 'Under a high-carbon pathway, the inflation pressure from temperature shocks could potentially expand to between 0.85%p and 1.04%p from 2076 to 2100.'
It added, 'The inflationary pressures from precipitation shocks could expand to between 0.47%p and 0.71%p between 2076 and 2100.'