JPMorgan warns super El Niño and oil shock could prop up global inflation

A rapidly intensifying El Nino weather pattern combined with higher energy prices could add 0.3 percentage points to global inflation next year, hitting emerging markets particularly hard, ‌JPMorgan economists said ⁠in a ⁠report on Friday.

Forecasts currently point to an 81% probability that the current El Nino episode develops into a "very strong" ​or "super" El Nino by the end of the year and a 97% chance that the conditions persist into next ​year.

Such an event would rank among the strongest seen in recent decades and raise the risk of disruptions to global food production and supply chains. JPMorgan estimated that a super El Nino on its own would raise global food inflation by about 0.7 ⁠percentage points at ‌its peak, with the biggest impact typically occurring four to eight months after the onset of the weather shock. However, when combined with the Iran war-driven jump in ⁠energy prices, which has raised costs of diesel, fertiliser and food packaging, the effect on global food inflation could roughly double to around 1.3-1.5 percentage points.


"The resulting jump in food inflation to a 5% annualised rate in 1H27 would add 0.6 percentage points to global headline inflation, slowing next year's expected inflation decline by 0.3 percentage points for the full year," JPMorgan's analysts said.

EMERGING MARKETS TO BEAR THE BRUNT

Emerging markets in Asia and Latin America would bear the brunt of the impact because food carries a ‌larger weight in consumer baskets and agriculture is generally more weather-sensitive.

India, Indonesia, Brazil and Colombia were identified as particularly exposed, while Taiwan and South Korea also looked vulnerable to food-price shocks, they added.

By contrast, direct ⁠El Nino-related food inflation impacts in Europe and other advanced economies are expected to be smaller. Instead, higher energy costs are likely to be the main driver of higher food prices in those ​countries.

The bank noted that current conditions are more favourable than during previous major El Nino episodes, with global grain inventories adequate, rice stocks in Asia relatively healthy and food inflation currently relatively low.

Still, the combination of a powerful El Nino and a sustained period of high energy prices could create a significant food-price impulse and make food inflation an increasingly important source of divergence between countries and regions. (Reporting by Marc Jones; Editing by Kirsten Donovan)