A new study by the Central Bank of Solomon Islands (CBSI) has revealed that climate change poses a growing threat to the country’s economic stability, particularly through its impact on inflation and food prices.
The research, which analyzed data from 2006 to 2019, highlights how extreme weather events—especially rainfall and temperature fluctuations—can disrupt agricultural production and supply chains, leading to volatile price movements.
“Climate change is no longer just an environmental issue—it’s an economic one,” said Kudili Ramo, a senior economist at CBSI.
“In a country like ours, where food accounts for nearly one-third of the headline Consumer Price Index, even small shifts in weather patterns can have outsized effects on inflation.”
The study found that domestic food inflation in the Solomon Islands is highly seasonal and closely tied to weather variability.
Locally produced items such as fruits, vegetables, and betel nut are particularly vulnerable to climate disruptions.
“Major flood events in 2008, 2010, and 2014 didn’t just damage infrastructure—they drove up food prices and triggered inflation spikes,” Ramo explained.
“The April 2014 flash flood alone pushed inflation from 3% to 7.2% within six months.”
Imported goods also play a significant role, contributing 66% to headline inflation.
However, the study emphasizes that domestic factors—especially those linked to climate—are increasingly influential.
While global research shows mixed results on the link between climate change and inflation, CBSI’s findings underscore the importance of localized analysis.
The study used a hybrid New Keynesian Phillips Curve (NKPC) model to assess inflation dynamics, revealing that expectations explain over 90% of variation.
“Lagged rainfall and temperature tend to reduce inflation by improving supply conditions,” Ramo noted.
“But extreme temperature events cause short-term spikes that usually reverse within a month.”
Rainfall volatility was found to slightly lower core inflation, while temperature volatility and extreme rainfall had no lasting effects.
Still, the cumulative impact of climate variability on food and headline inflation was deemed moderate but meaningful.
The Central Bank is now exploring ways to integrate climate indicators into its inflation forecasting models—a move aligned with global trends among monetary authorities.
“We must evolve our tools,” Ramo said. “Understanding how climate interacts with inflation helps us fulfill our mandate of price stability. It’s not just about numbers—it’s about resilience.”
The study concludes that while inflation in the Solomon Islands is largely expectation-driven, climate-related factors—especially rainfall and temperature—play a modest but important role. As climate risks intensify, CBSI is urging policymakers to consider environmental data in economic planning.
By AGNES MENANOPO
Solomon Star, Honiara
