Do climate shocks drive inflation in India? Evidence from State-level Data

Abstract

This paper analyzes the effect of climate shocks on state inflation in India based on a panel data model. An analysis of whether climate variability is a factor that leads to price instability will be investigated by combining temperature deviations, rainfall anomalies, and extreme weather indicators with state-level inflation data. The results indicate that a positive and statistically significant influence on inflation is provided by shocks of temperature, whereas a negative impact on price pressure is observed when rainfall falls are involved, especially through food channels. The findings also reveal that food inflation is also the most sensitive to climate variability compared to the general CPI inflation, implying that agricultural supply shocks are an important factor in the transmission of climate shocks to the economy at large. The effect of inflation in the states that are agriculturally dependent and in the north is stronger, as witnessed by the regional heterogeneity analysis. Robustness tests ensure that the relationship is stable to alternative definitions of climates, lag patterns, and model specification. The paper highlights the increasing macroeconomic importance of climatic risk in developing economies and the necessity to incorporate climate concerns in monetary policy and agricultural planning. In general, the results offer empirical data to support the fact that climate variability has become a significant structural factor of inflation processes in India.