Extreme temperatures and inflation
Faccia et al. look at data from 48 advanced and emerging economies, over the period from 1990 to 2018, to examine the effect of extreme temperatures on various measures of prices, namely consumer prices, producer prices and the GDP deflator. Using a two-country New Keynesian model where temperature influences the productivity of agricultural goods, they conclude that higher temperatures over recent decades have played an increasingly non-negligible role in driving price developments, both in the short and the medium term. In addition, their findings include:
- Timing matters: extreme temperatures have differing impacts depending on when they occur within the year;
- The horizon also matters: they find evidence of negative inflation dynamics in the medium term, again particularly noticeable in emerging economies. This suggests that short-term supply disruption in agriculture can result in more longer-lasting downward pressure on demand;
- The impact is non-linear, both in terms of divergence from average temperatures, and in terms of absolute temperature.
Feeling the heat: extreme temperatures and price stability
Authors: Donata Faccia, Miles Parker, Livio Stracca
From: ECB
Climate related inflation in Europe
In this paper, Beirne et al. estimate panel and country-specific structural vector autoregression (VAR) models by combining estimated damages of disaster events with monthly data for the Harmonised Index of Consumer Prices (HICP) for all euro area countries over the period 1996-2021. They look at the effects of adverse climate shocks both at the overall headline inflation as well as on its 12 main sub-indices and further sub-categories of food price inflation in order to disentangle differences in the direction and strength of price effects across consumption categories.
Our results suggest significantly positive effects of natural disasters on headline inflation, with diverging results at the sub-index level. Positive inflation effects are particularly pronounced for prices of food and beverages, while negative effects prevail for other sub-indices. In addition, country-specific impulse response functions aggregated over a 6-month horizon indicate that the mainly positive significant inflation responses in Italy and Spain outweigh the negative responses in Germany and France. Moreover, as expected, no long-lasting effects of natural disasters shocks on inflation are found, with impulse response converging to zero and becoming insignificant from around 6 months after the disaster shock.
The Effects of Natural Disasters on Price Stability in the Euro Area
Authors: John Beirne, Yannis Dafermos, Alexander Kriwoluzky, Nuobu Renzhi, Ulrich Volz, Jana Wittich
From: European Central Bank, SOAS University of London, Martin Luther University of Halle-Wittenberg, Asian Development Bank Institute, German Institute for Economic Research
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