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The Impact of Disasters on Inflation

Abstract

This paper studies how disasters affect consumer price inflation. There is a marked heterogeneity in the impact between advanced economies, where the impact is negligible, and developing economies, where the impact can last for several years. There are also differences in the impact by type of disasters, particularly when considering inflation sub-indices. Storms increase food price inflation in the near term, although the effect dissipates within a year. Floods also typically have a short-run impact on inflation. Earthquakes reduce CPI inflation excluding food, housing and energy.

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Notes

  1. The estimation here additionally includes mass movements, insect infestations, extreme temperatures, volcanoes and wildfires, but since those disasters combined are not found to have significant impacts we do not discuss these disaster types in any detail.

  2. In some jurisdictions it is illegal to increase prices of certain goods, termed ‘price gouging’, in the immediate aftermath of a disaster (Gerena 2004).

  3. For robustness, we also estimate using country seasonal dummies and using data seasonally adjusted using X12 (not reported). The results using the seasonally adjusted data are qualitatively similar to those presented here, although the impact of windstorms on food is no longer significant. As noted above, this lack of significance is unsurprising.

  4. The Pesaran (2004) test is carried out in Stata using the xtcsd command of Hoyos and Sarafidis (2006). The estimation using Driscoll and Kraay (1998) adjusted standard errors is implemented using the xtscc command developed by Hoechle (2007).

  5. Note that unlike the other disasters considered here, droughts may continue for several quarters, indeed even years. The 75th percentile drought is also much greater in impact than the 75th percentile of the other disasters.

  6. Regression results are available on request.

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Acknowledgements

The author thanks Ilan Noy, Eric Strobl and Paul Raschky for useful comments.

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Correspondence to Miles Parker.

Additional information

This work was carried out while the author was employed by the Reserve Bank of New Zealand. The views expressed here are those of the author, and not necessarily those of the RBNZ or the European Central Bank.

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Appendix: Country Classifications and Incidence of Disasters

Appendix: Country Classifications and Incidence of Disasters

Table 7 Country classification and incidence of disasters

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Parker, M. The Impact of Disasters on Inflation. EconDisCliCha 2, 21–48 (2018). https://doi.org/10.1007/s41885-017-0017-y

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  • DOI: https://doi.org/10.1007/s41885-017-0017-y

Keywords

  • Disasters
  • Inflation

JEL Classification

  • E31
  • Q54