Running On Empty: Climate Risks And The Fragility Of Global Energy And Food Supply Chains − Speech By Swati Dhingra, Bank Of England, Member Of The Monetary Policy Committee, Given At The World Resources Institute, London

Speech

Introduction

Good evening, and thank you for the invitation to speak.

Recent events in the Gulf are another reminder that inflation is often driven by forces beyond the reach of monetary policy. The recent rise in energy prices has once again exposed the vulnerability of economies to geopolitical shocks and the difficult choices they create for central banks.

Increasingly, those shocks are linked to climate and energy systems. Dependence on fossil fuels, the physical impacts of climate change, and the policies required to decarbonise economies are no longer peripheral risks: they are all becoming more important determinants of inflation and macroeconomic stability.

This evening, I want to explore what that means for inflation, for the clean energy transition, and for central banks in the years ahead.

Climate risks to inflation

Climate change is relevant to inflation through three distinct channels. The first is the economy’s ongoing dependence on geopolitically exposed fossil fuels, which significantly affect headline inflation via direct energy components of CPI as well as a wide range of energy-intensive goods and services. The second is the physical impact of a changing climate, as increasingly frequent and severe extreme weather events disrupt supply, particularly in the agricultural sector. The third is the policy response to climate change, as the measures required for a green transition can generate their own inflationary pressures. In other words, the drivers, the consequences, and the solutions to climate change are all relevant to price stability (Talbot, 2026)^footnote[1]. These channels are becoming more material over time. Climate-related shocks can, in principle, be assessed like any other shock, by weighing their expected effects on inflation and output. But two features make them particularly challenging: their salience for households, especially through food and energy prices, and their increasing frequency and severity, which make their first-round effects progressively harder to look through (NGFS, 2026aOpens in a new window ).

Before discussing these channels, it is worth being clear about the role of monetary policy. Climate policy is rightly the responsibility of elected governments. The role of central banks is not to deliver the transition, but to maintain price stability in an economy increasingly affected by climate change and the green transition. The question I will address here is not whether central banks should pursue climate objectives, but how climate-related shocks affect inflation and the conduct of monetary policy.

Energy prices are ‘systemically significant’ for inflation, because a wide range of goods and services depend critically on energy as an input. As shown in Figure 1, energy price shocks have coincided with the vast majority of UK inflationary episodes. Energy price spikes coincided with eight of the ten episodes in which inflation was near or above 5%.