The effects of temperature shocks on energy prices and inflation in the Euro Area

Francesco Lucidi, Marta Maria Pisa and Massimiliano Tancioni

European Economic Review, 2024, vol. 166, issue C

Abstract: This paper traces the existence of an energy transmission channel of temperature anomalies to Euro-Area inflation. We show that, on average, warmer temperature shocks elicit a negative energy demand shift, exerting moderate deflationary pressure. By looking into several asymmetries and macroeconomic indicators, we rationalize that evidence as signaling that the “turn-off-heating” effect in Europe outweighs the “turn-on-cooling”. This result becomes clearer when energy market responses are decomposed into gas and electricity components. Weak inflationary effects from non-energy items are at play when the shock hits during warm seasons. A persistent inflationary tendency manifests when food and energy prices rise, an outcome emerging only when negative anomalies – cold spells – hit. These findings shed new light on monitoring price stability due to global warming.

Keywords: Climate change; Temperature shock; Macroeconomics; Inflation; Local projections; Energy market; Euro Area (search for similar items in EconPapers)
JEL-codes: C3 E3 E31 Q4 Q43 Q54 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:166:y:2024:i:c:s0014292124001004

DOI: 10.1016/j.euroecorev.2024.104771

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