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Climate Risks and Forecastability of US Inflation: Evidence from Dynamic Quantile Model Averaging

Author

Listed:
  • Jiawen Luo

    (School of Business Administration, South China University of Technology, Guangzhou 510640, China)

  • Shengjie Fu

    (School of Business Administration, South China University of Technology, Guangzhou 510640, China)

  • Oguzhan Cepni

    (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Ostim Technical University, Ankara, Turkiye)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

This study examines the impact of climate-related risks on the inflation rates of the United States, focusing on the overall Consumer Price Index (CPI) and its significant components, namely food and beverages and housing inflation. Employing quantile regression models and a comprehensive dataset spanning from January 1985 to September 2022, we analyze five specific climate risk factors alongside traditional macroeconomic predictors. Our findings indicate that models incorporating individual climate risks generally outperform those considering only macroeconomic factors. However, models combination strategies that integrate all five climate risk measures consistently deliver superior forecasting performance. Notably, the pronounced effect of climate risks on food inflation significantly contributes to the observed trends in the overall CPI, which is largely driven by this subcomponent. This research highlights the crucial role of climate factors in forecasting inflation, suggesting potential avenues for enhancing economic policy-making in light of evolving climate conditions.

Suggested Citation

  • Jiawen Luo & Shengjie Fu & Oguzhan Cepni & Rangan Gupta, 2024. "Climate Risks and Forecastability of US Inflation: Evidence from Dynamic Quantile Model Averaging," Working Papers 202420, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202420
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    References listed on IDEAS

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    More about this item

    Keywords

    Climate risks; US inflation; Dynamic quantile moving averaging; Forecasting;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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