This Is Going to Hurt: Weather Anomalies, Supply Chain Pressures and Inflation

IMF Working Papers, April 5, 2024

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Canonical URL: This Is Going to Hurt: Weather Anomalies, Supply Chain Pressures and Inflation

Title: This Is Going to Hurt: Weather Anomalies, Supply Chain Pressures and Inflation
Authors: Serhan Cevik, Gyowon Gwon
Publication date: April 5, 2024
Abstract summary:
- As climate change accelerates, the frequency and severity of extreme weather events are expected to worsen and have greater adverse consequences for ecosystems, physical infrastructure, and economic activity across the world.
- The paper investigates how weather anomalies affect global supply chains and inflation dynamics using monthly data for six large and well-diversified economies over the period 1997-2021 and implements a structural vector autoregressive model.
- Results—based on high-frequency data and robust to alternative estimation methodologies—show weather anomalies can disrupt supply chains and subsequently lead to inflationary pressures, with cross-country variation depending on severity and vulnerability.
- The impact of weather shocks on supply chains and inflation dynamics is likely to become more pronounced with accelerating climate change that can have non-linear effects.

Coverage:
- Countries analyzed: China, the Euro area, Japan, Korea, the United Kingdom, and the United States.
- Frequency: Monthly data.
- Sample period: 1997-2021.
Method:
- Structural vector autoregressive (SVAR) model.
- Results validated with high-frequency data and are robust to alternative estimation methodologies.

Supply chain disruption:
- Weather anomalies could disrupt supply chains across the six large and well-diversified economies studied.
Inflationary impact:
- Weather-induced supply chain disruptions can subsequently lead to inflationary pressures.
Cross-country heterogeneity:
- Effects vary across countries depending on the severity of weather shocks and vulnerability to supply chain disruptions.
Future risk:
- With accelerating climate change, impacts on supply chains and inflation dynamics are likely to become more pronounced and may exhibit non-linear effects.

For central banks:
- Consider the impact of weather anomalies on supply chains and inflation dynamics to prevent entrenching second-round effects and de-anchoring of inflation expectations.
For governments:
- Invest more in climate change adaptation to strengthen critical infrastructure and thereby minimize supply chain disruptions.