Impact of climate change on price stability in South Africa: an econometric analysis

Purpose This study analyses the impact of climate change on price stability in South Africa by using quantitative analysis of annual data from 1990 to 2020. Design/methodology/approach The study runs unit root tests to test whether a time series variable is stationary. The auto-regressive distributive lag (ARDL) approach for cointegration is employed to evaluate the long-run impact of climate change on price stability. Findings The ARDL bound test analysis illustrates a cointegration relationship between the CPI and the three macroeconomic (interest rate, oil price and real effective exchange rate) and two climate change indicators (rainfall and temperature) variables. Results show that both temperature and rainfall have a significant negative relationship with inflation, hence climate change should be part of a macroeconomic policy framework. While some studies found a negative relationship between inflation and temperature in seasons other than summer, the current study found a negative relationship probably because it used annual data. Interest rate and oil price show a significant positive long-run relationship with inflation, while real effective exchange rate shows an insignificant negative long-run relationship with inflation. Research limitations/implications The study uses temperature as a proxy for climate change due difficulty in obtaining accurate data for CO2 emissions. Future research should, therefore, test different other proxies and use a larger sample, to either agree with the findings or justify any deviation therefrom. Practical implications The findings of the study indicate the existence of a statistically significant long-run impact of climate change proxied by rainfall on inflation. Thus, this suggests that variations in seasonal rainfall and an escalation in weather changes diminish agricultural supply, including food products, leading to increased food prices and overall inflation. The substantial effect that climate change-related rainfall has had on South Africa’s inflation rate highlights the prerequisite for the Reserve Bank to take climate change into account when developing their monetary policy frameworks. This integration is crucial, as it serves as the initial phase for the Reserve Bank to adeptly implement their monetary policy objectives. This highlights that climate change effects are multidimensional and the fight against it should be collective. Based on this analysis, the immense pressing issue is not the lack of macro-level climate change programs or policies, but rather the establishment of effective policies that can successfully mitigate climate change in South Africa. Therefore, the Reserve Bank should take climate change into account when implementing its monetary policies. This may be attributed to the fact that, with their current macroeconomic forecasting models, it is becoming increasingly difficult for them to pinpoint the causes of inflationary pressures and create practical countermeasures as a result of climate change. They can then improve the processes by which they identify and evaluate risks associated with climate change and promptly adjust their strategies in response to alterations in the pace and severity of climate change. Originality/value The study uses recent data to clarify the relationship between inflation and climate change in the South African context using rainfall and temperatures as proxies for climate change.