Impact of Climate Change on Inflation in 26 Selected Countries

Abstract

In the era of persistent globalization, climate governance has emerged as a prominent concern within both the theoretical community and government departments of diverse nations. Of particular interest in academic research is the adverse effect of climate shocks on the global economy. This paper employs average temperature as a surrogate indicator for climate shocks and examines the influence of temperature fluctuations on inflation levels using a balanced panel dataset from 1995 to 2021. The findings indicate a positive association between temperature change and inflation within the country, which remains consistent even after subjecting the analysis to multiple robustness tests. Furthermore, accounting for heterogeneity reveals variations in the magnitude of response of inflation levels to temperature fluctuations. Regarding the analysis of underlying mechanisms, this study underscores the significance of energy demand as a pivotal pathway influencing inflationary pressures at the national level. Lastly, by incorporating GDP per capita as a threshold, this research reveals a nonlinear relationship between temperature change and inflation levels.