Bank for International Settlements finds droughts in the Americas depress GDP for two years while inflation effects are largely temporary

The Bank for International Settlements published a BIS Bulletin analysing how different types of extreme weather events transmit to economic activity and inflation in the Americas, using empirical evidence from eight major economies. The study finds that droughts have the most persistent macroeconomic effects, reducing output over the subsequent two years, while the inflation impact of extreme weather events is generally short-lived. The analysis attributes the prolonged GDP effect of droughts to lasting damage to agriculture, forestry and electricity production. Price effects are concentrated in the months immediately after an event: droughts and wildfires temporarily lift food prices, and droughts and storms temporarily raise energy prices, but the study finds no persistent impact on food, energy or core inflation. The Bulletin also notes that risk-sharing across regions can cushion localised shocks but may be limited when affected areas account for a large share of production, and it highlights the role of insurance in financing recovery amid rising premiums and a potentially widening insurance gap. On policy implications, the Bulletin argues that monetary policy responses should depend on the nature of the shock and the balance of output and inflation effects, tightening when price impacts threaten to become persistent (for example if fiscal support or insurance payouts sustain demand) and loosening when events destroy physical capital and weigh on aggregate output while inflation expectations remain anchored.