From Heatwaves to Cold Spells: How Extreme Temperature Events Shape Inflation in Germany

Michel Grimm and Torben Klarl

No 2502, Bremen Papers on Economics & Innovation from University of Bremen, Faculty of Business Studies and Economics

Abstract: In this paper, we develop a novel methodology to identify temperature surprise shocks for hot and cold extreme weather events using granular ground station- and satellite-based weather data for Germany. We focus on food and energy prices, which are key drivers of inflation in Germany and, at the same time, are themselves strongly affected by climate-related shocks. A positive heat shock of one standard deviation increases food prices by up to 0.39% in summer, while the same type of shock in winter decreases energy prices by 0.88%. Moreover, our results indicate that food prices are driven primarily by supply-side factors, as the interaction of a heat shock with a drought variable amplifies the effect through its impact on agricultural production, whereas energy prices respond mainly to demand-side factors, such as changes in heating and cooling needs. Using our identified weather shocks, we estimate the causal effects of extreme temperatures on these two components and trace their pass-through to headline inflation. These results are robust when accounting for nonlinearities arising from seasonality and shock magnitude, the role of transmission channels such as renewable energy production, droughts, and different learning periods in which agents form expectations from past weather shocks.

Keywords: Weather shock construction; granular weather data; energy prices; food prices; temperature shocks; business cycle; climate change (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 Q54 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2025-08
New Economics Papers: this item is included in nep-env and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:atv:wpaper:2502

DOI: 10.26092/elib/4414

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