All the focus has been on DeepSeek this week, and its implications for the AI race between China and the US. Climate change has fallen far down the list of investors’ concerns. However, the planet is warming at an accelerating rate, and the impact of climate change on markets could gradually grow to become just as important as AI. The details of the latest Tokyo CPI print are important in this regard: they reveal how climate change is already having a material impact on inflation in some countries.
Central banks will have a harder time “seeing through” food and energy price spikes, as the frequency and severity of adverse weather events increases. The latest acceleration in Tokyo food price inflation in Japan, is indicative of the type of negative supply shock that will become more frequent as the planet warms, and extreme heat, storms and floods intensify in the coming years. The ongoing rise in JGB yields should not be overlooked. Accelerating food price inflation will help push JGB yields even higher this year, and this will continue to have important repercussions for global bond markets, including US Treasuries.
Headline Tokyo CPI inflation quickened from 3.10% to 3.38% in January, led by an acceleration in fresh food inflation from 18.41% to 23.80%. Fresh vegetable prices increased 36.6% y/y: cabbage prices surged 204.6% y/y after last year’s record summer heat and heavy rain ruined crops. The price of fresh fruits also rose 24.4% y/y in January. Non-perishable food price inflation firmed from 4.00% to 4.70% too in January. Rice prices have spiked 70.7% y/y.
