Oil shocks and climate change are making the fight against inflation a race to exhaust productive forces. A new report from the Oxford School of Economics predicts food inflation to be a permanent monster that will dictate tight monetary policy to central banks for years to come due to climate disruptions.
Global warming provokes natural disasters and heat waves. This causes crop failures, breaks infrastructure and tears up supply chains – exactly the picture Europe is seeing already this week, the study said. As a result, food is becoming more expensive and central banks are under added pressure to rein in inflation at the expense of productivity.
Europe will face its biggest food shock yet
Extreme weather threatens the world with a food crisis, and the eurozone will be hit hardest. This is the conclusion reached by Oxford Economics experts, whose report is cited by Bloomberg.
Economists Robert Marks and Ronan Hegarty have calculated: because of climatic shifts in food prices in the eurozone countries can jump by 1.6 percentage points annually. The overall inflation rate, they predicted, would rise by 0.6 percentage points. And that would be just because of food, not to mention other factors.
The authors of the report point out that climate change and the depletion of natural resources are unwinding the inflationary spiral and making food prices highly volatile. This poses long-term threats to the economy. Fresh research has identified at least 14 cases of localized or regional price spikes since 2022 caused precisely by extreme weather conditions.
Here are just two examples. Drought in Brazil raised global coffee prices by 55% between 2023 and 2024. And heat waves in Ghana and Côte d’Ivoire jacked up the cost of cocoa by 280%.
Europe has proved more vulnerable to global markets than other G7 countries. By comparison, the UK could see a 1 percentage point increase in food prices, while the US and Japan could see increases of only 0.28 and 0.35 percentage points, respectively.
“On average, it will take the world two and a half years for commodity prices to return to pre-crisis levels. Central banks are now actively studying how climate change is affecting food supplies and pricing,” the report said.
Oxford Economics researchers insist: the cost of agricultural and food products must be included in climate stress tests, scenario analysis and overall risk management.
Food inflation in Moldova
Food inflation in Moldova in 2026 is projected at 4.9%. At the same time, the overall annual inflation rate in the country is estimated by the International Monetary Fund and the World Bank to be 7.2% – 8.1%.
Official consumer price inflation reached 6.8% in April, and the National Bank of Moldova (NBM) raised its forecast and prime rate (6.5% p.a.) in an effort to cool domestic demand.
Since food expenditures account for a critically high share in the budget of citizens – about 40% of the total consumer basket – food inflation exerts extremely heavy pressure on the population, whose income polarization is very large and uneven, despite the declared nominal growth of wages. At the same time, the real rise in food prices outpaces the general economic indicators and the real growth of wages.
“If we recalculate the average salary of 2025 in the prices of 2019, removing the inflationary component, the growth of wages turns out to be quite modest. Over the past six years, the average real wage has grown by 19%, and the average annual growth rate of real wages amounted to about 3% (and this at a low base),” calculated expert Marina Solovieva.
For the same six years (2019-2025), the expert continues, the average annual GDP growth rate in Moldova amounted to about 1%, which is less than the average annual real wage growth rate of 3%. We can say that employees now actually have some advantage in the labor market over employers and can push through small increases in real wages, which, yes, grew, rather, not because of productivity increases, but due to indexation, Marina Solovieva believes.
The mechanism of pressure on the central bank is as follows: expensive food makes people wait for further price increases, workers demand raises to compensate for living expenses, rising wages force businesses to raise prices of goods again.
Why cool demand when everything is already “in the shade”?
But the regulator believes that the increase in household incomes creates “unnecessary inflationary pressure”. Even if the “doubling” of nominal wages, which is so assiduously talked about, is imaginary, as Marina Solovieva’s calculations have shown.
Therefore, restricting domestic demand, including loans, in order to fight inflation is at least misleading.
The rise in the price of products creates a supply shock, which causes consumers to spend more, accelerating demand inflation. Central banks are forced to react. So, to cool the economy, they raise the prime rate, which makes borrowing more expensive and reduces business activity, but slows price increases. That’s the ideal.
In Moldova there is nothing much to “cool” so far. After the crisis post-crisis inflation, which exceeded the 30% mark, the National Bank has not managed to curb domestic demand for a long time. And even now, with the oil shock, Moldovan motorists have not rushed to transfer to public transport….
It is not enough to withdraw cheap money from the observed economy. Demand in the country is often formed from other informal sources of income. The authorities cannot make it more profitable to develop production where shadow incomes would migrate. Or does not want to.
The dilemma of regulators, including Moldovan regulators, is that food inflation is a classical non-monetary problem, and it is more expensive to solve it only by monetary methods. They (regulators) are forced, following the orthodox rules, to raise interest rates in order to curb overall inflation and anchor inflationary expectations.
Since rising food prices are most often caused by supply shortages or rising agribusiness costs (fertilizer, fuel, logistics), higher rates do not address the root cause, but only cool economic growth. This creates a vicious cycle of pressure on the economy. What are we fighting for?
