Severe weather shocks lift food and energy prices by 5 percent
A South African Reserve Bank study of 65 countries from 2000 to 2024 finds that extreme weather shocks drive upstream inflation in food and energy while sparing core prices. Authors Serena Merrino and Xolani Sibande advise central banks to look through transitory climate price spikes.
Non-linear spikes in food and fuel
Analyzing monthly data across five sectors, the study shows that weather anomalies primarily trigger cost-push inflation in food, energy, and transport.
Pass-through effects are highly non-linear: a three-standard-deviation drought in arid climates lifts food and energy prices by approximately 5 percent.
In contrast, heavy precipitation reduces energy inflation by roughly 5 basis points by boosting hydropower output.
In South Africa, compound shocks combining severe heat and drought generate the most durable price surges, while foreign heat waves in major agricultural exporters like Brazil and the United States transmit to domestic food prices after several months.
Core inflation remains muted across all baseline specifications.
Credible targets decouple core prices
Institutional frameworks significantly alter inflation outcomes.
In the 44 inflation-targeting economies examined, credible policy anchors expectations, keeping core inflation flat and heavily dampening weather-induced price surges.
Conversely, across 21 non-targeting regimes, heat waves push core inflation up by 0.5 percentage points.
The authors note that systematic monetary tightening against supply shocks deepens output losses without fixing supply bottlenecks, necessitating fiscal adaptation instead.
Sound logic with a dangerous blind spot
The paper makes a compelling case against reflexive rate hikes during temporary weather shocks.
However, advising central banks to look through food spikes underestimates how quickly salient prices erode public trust.
If compound climate disasters become routine, passive surveillance will fail to anchor expectations.