Why in the news?

Extreme weather conditions may pose a risk to inflation, along with prolonged geopolitical tensions that could keep crude oil prices volatile, the Reserve Bank’s April Bulletin said on April 23.

RBI’s Monetary Policy Report on the impact of climate shock and extreme weather events on food inflation:

• Effects of Food Inflation: The report highlights the significance of extreme weather events and climate shocks in affecting not only food inflation but also the broader impact on the natural Rate of Interest and Financial Stability.
• Broader Economic Impact: Climate shocks and extreme weather events are mentioned to have a broader impact on the economy’s financial stability, indicating that disruptions in food production and supply chains due to these events can lead to inflationary pressures beyond just the food sector.
• Use of Economic Modeling: The report mentions the utilization of a New-Keynesian model incorporating a physical climate risk damage function to estimate the macroeconomic impact of climate change. This likely includes projections on how climate shocks affect food production and subsequently food inflation.
• Warning on Long-Term Output Reduction: The report warns that without climate mitigation policies, the long-term economic output could be lower by around 9% by 2050. This suggests that climate shocks and extreme weather events could have lasting effects on food production and inflation.
• Potential for Inflation Hysteresis: There’s a warning about the potential for inflation hysteresis to become entrenched, which could lead to a de-anchoring of inflation expectations. This implies that persistent disruptions caused by climate shocks could lead to sustained increases in food inflation.

Way Forward:

• Need Investment in Climate Resilience: Governments and businesses can invest in climate-resilient agriculture practices and infrastructure to mitigate the adverse effects of extreme weather events on food production.
• Need Diversification of Food Sources: Diversifying food sources can help reduce reliance on regions prone to climate-related disruptions. This could involve promoting local food production, supporting small-scale farmers, and investing in alternative food production methods such as vertical farming or hydroponics.

Mains PYQ 

Q What policy instruments were deployed to contain the great economic depression?

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