The Rise and Fall: Climate Change and Inflation Modelling

In recent years, the shifting dynamics of global inflation have prompted a re-evaluation of future inflation expectations.  A key factor over the next twenty years will be the impact of climate-related risks – the potential impact of the different transition pathways and the impact of the physical climate changes already baked-in. The challenge for actuaries, risk professionals and anyone looking at future scenarios is that this future hasn’t happened. Moreover, these types of risks – transition to a low-carbon economy and increased physical risks – aren’t key features of past inflation models.  In this forum, we investigate how we can model climate-transition impacts through prospective causal modelling risk techniques. This enables us to develop scenarios that can help us understand how climate-related risks may reshape the inflationary landscape.   The presentation will build on a recent article in The Actuary and cover: 

1. Climate-transition and inflation : how the transition to a low-carbon economy could drive inflation higher and make it more volatile in the short term. 
2. How to create prospective views and scenarios: how causal models can provide a mapping of potential inflationary drivers and the precursors to inflationary spikes.
3. Illustrate potential precursors to future inflationary spikes: underscoring the importance of situational awareness and supporting preparedness and resilience
4. Practical implications for actuaries:  developing robust challenges to implicit assumptions and solvency assessments, assessing organisational resilience and developing mitigating strategies