IMF Working Papers

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

By Serhan Cevik, Gyowon Gwon

April 5, 2024

Download PDF Order a Print Copy

Preview Citation

Format: Chicago

Serhan Cevik, and Gyowon Gwon. This Is Going to Hurt: Weather Anomalies, Supply Chain Pressures and Inflation, (USA: International Monetary Fund, 2024) accessed October 13, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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. This paper investigates how weather anomalies affect global supply chains and inflation dynamics. Using monthly data for six large and well-diversified economies (China, the Euro area, Japan, Korea, the United Kingdom, and the United States) over the period 1997-2021, we implement a structural vector autoregressive model and document that weather anomalies could disrupt supply chains and subsequently lead to inflationary pressures. Our results—based on high-frequency data and robust to alternative estimation methodologies—show that these effects vary across countries, depending on the severity of weather shocks and vulnerability to supply chain disruptions. 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. These findings have important policy implications. Central bankers should consider the impact of weather anomalies on supply chains and inflation dynamics to prevent entrenching second-round effects and de-anchoring of inflation expectations. More directly, however, governments can invest more for climate change adaptation to strengthen critical infrastructure and thereby minimize supply chain disruptions.

Subject: Climate change, COVID-19, Economic theory, Environment, Health, Inflation, Natural disasters, Prices, Supply shocks

Keywords: Climate change, COVID-19, Global, Inflation, Inflation dynamics, Inflation expectation, Natural disasters, North America, Structural VAR, Supply chain disruption, Supply chain pressure, Supply chain pressures, Supply shocks, Temperature, Weather anomalies, Weather anomaly

Publication Details

  • Pages:

    31

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/079

  • Stock No:

    WPIEA2024079

  • ISBN:

    9798400269523

  • ISSN:

    1018-5941