Extreme weather is already impacting UK inflation, with chocolate prices rising significantly. Swati Dhingra, an independent member of the Bank of England’s Monetary Policy Committee, has highlighted that chocolate alone contributed roughly one percentage point to UK food inflation in 2025. This reflects a surge in cocoa prices driven largely by extreme heat in west Africa, and the fact that chocolate accounts for close to six per cent of the UK food basket.
The inflationary ripple effect is not limited to confectionery. Droughts in southern Europe pushed olive oil prices up by 64 per cent last year, accounting for nearly half of Greece’s headline food inflation in April 2024. The UK’s heavy reliance on imported food makes it especially vulnerable to these global climate shocks. Analysis by the Energy and Climate Intelligence Unit found that 13 per cent of UK food imports in 2025 came from countries that are the least climate resilient yet most exposed to extreme weather. These imports include rice from India, soft and citrus fruits from South Africa, Peru and Egypt, coffee from Vietnam and Brazil, Colombian and Ecuadorian bananas, and Kenyan tea.
Beyond the price tag, the human cost is stark. The ECIU calculates that agricultural workers in the 15 most climate‑vulnerable countries lost an estimated 216 billion hours to heat stress in 2024 – roughly 590 hours per worker, equivalent to nearly 49 working days annually – with those losses accelerating.
But the impact of extreme weather on the economy extends well beyond the supermarket aisle. The finance lobby group TheCityUK, in a report written with the insurer Marsh, has warned of a mounting “protection gap” in the insurance market. Traditional actuarial methods, which assume the underlying probability of loss is broadly stable year to year, are becoming less reliable as climate hazards intensify. That undermines the confidence with which insurers model expected future losses, leaving homeowners and businesses increasingly uninsured or underinsured in the face of floods and wildfires.
The Association of British Insurers reported a record £585 million in home weather‑damage payouts for 2024. Insurers are being forced to raise premiums sharply or withdraw coverage in high‑risk areas. Some areas, according to the research, may become uninsurable in the long term. UK small and medium‑sized enterprises are already finding insurance more selective, expensive and complex. The UK government and insurers launched Flood Re in 2016 to keep cover affordable for high‑risk households, but progress on flood defences has been slow: the government’s £5.2 billion flood defence programme is reportedly 40 per cent behind schedule.
TheCityUK argues that the difficulties of pricing climate risk are “not simply a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity”. When insurance becomes harder to obtain or more costly, it affects lending, investment and asset values across the financial system. The report warns of a vicious cycle: too little spending on adaptation increases the cost of climate damage, which in turn raises the cost of investment as insurers and lenders recoup their losses.
Monetary policy: a blunt instrument for climate shocks
The interplay between extreme weather and inflation creates a particular dilemma for the Bank of England. Dhingra has made clear that monetary policy – interest rates – is a blunt instrument when it comes to dealing with price shocks arising from climate change, energy markets or the green transition. Raising interest rates to offset climate‑driven inflation also increases the cost of borrowing for the very investments needed to move to net zero and adapt to a warming world. Similarly, using higher rates to constrain inflationary effects from rocketing energy prices – most recently driven by the Iran war – could raise the cost of investing in renewable alternatives that would help insulate the UK from such geopolitical chaos.
Dhingra argues that monetary policy remains essential for anchoring inflation expectations and preventing temporary price shocks from feeding into broader wage and price‑setting. But she says governments may need to be poised to cushion consumers against these repeated shocks with targeted support measures, leaving the Bank to focus on the bigger picture. That could mean targeted subsidies, price controls or temporary tax measures – tools that, after a series of economy‑wide shocks (Covid, Ukraine, Iran), politicians have become more used to deploying in ways that would have been taboo until recently.
TheCityUK’s report similarly points to the need for more active government intervention. It suggests there may have to be more public – or partly public – backstops for insurance, and notes that the UK is lacking a clear, coherent overarching strategy for the net zero transition. An economy‑wide national delivery plan, backed by sector‑specific strategies and policy instruments, is needed. Finance for adaptation and resilience is not flowing at the scale required, held back by short‑term decision‑making and difficulties in valuing avoided losses. Without urgent action, underinvestment in resilience could make insurance less available and affordable, reducing investment and leaving more losses to be borne by households, businesses and the public sector.
One of the early decisions facing Andy Burnham as he races towards No 10 will be whether, and how much, to intervene this autumn to prevent the full force of the Middle East crisis from being felt in the public’s energy bills. In the era of the climate emergency, the shocks are coming thick and fast, and policymakers must be ready to act – crucially, while protecting the green transition.
