Does rainfall affect inflation? Evidence from Indonesia’s regional heterogeneity

This study analyzes the impact of seasonal rainfall variations on inflation in Indonesia, using panel data from 82 cities between 2014 and 2019. While prior research links weather conditions, particularly rainfall, to inflation through effects on agricultural production, our findings challenge this view. Using fixed effects regression models, we observe a statistically significant negative relationship between rainfall and inflation at the district level; however, the effect sizes are economically negligible. When time fixed effects are added, capturing national-level factors like monetary policy and global conditions, rainfall’s impact becomes statistically insignificant. Robustness checks, including weighted two-way fixed effects models, placebo tests, and extending the observational period to 2023, confirm the consistency of these results. The findings suggest that national-level policies overshadow minor local effects of rainfall on inflation. Policymakers should prioritize macroeconomic strategies over local environmental factors when addressing inflation, highlighting the limited role of weather variability.