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Decomposing the Inflation Response to Weather-Related Disasters

Author

Listed:
  • Erwan Gautier
  • Christoph Grosse Steffen
  • Magali Marx
  • Paul Vertier

Abstract

This paper provides a novel instrumental variable approach for the estimation of dynamic causal effects of weather-related disasters on consumer prices. We compute compositional effects by combining monthly granular inflation rates for 12 CPI product categories with weights in consumption baskets from French overseas territories. We find that disasters lead to a maximum rise in consumer prices of 0.5% with substantial heterogeneity in the price response. An immediate strong surge in the prices of food, and notably of fresh products, is partially offset by a decline in the prices of manufactured products and services. The effects of weather-related natural disasters dissipate after four months and differ along the income distribution, notably raising inflation more for low-income households. Evaluating a policy that implemented price caps in 2013, we find that price regulation dampened the price response on impact, but did not prevent prices from adjusting in the long run.

Suggested Citation

  • Erwan Gautier & Christoph Grosse Steffen & Magali Marx & Paul Vertier, 2023. "Decomposing the Inflation Response to Weather-Related Disasters," Working papers 935, Banque de France.
    • Handle: RePEc:bfr:banfra:935
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    References listed on IDEAS

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    1. Grosse-Steffen, Christoph & Pagenhardt, Laura & Rieth, Malte, 2025. "Committed to flexible fiscal rules," Journal of Monetary Economics, Elsevier, vol. 154(C).

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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