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El Niño and emerging markets food prices

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Food prices have been increasing since the start of the year, and the rising odds of a strong El Niño, as well as elevated energy / shipping costs imply upside risks to headline inflation. In an increasing inflation world, emerging markets are more exposed than developed markets, as food has a larger share in inflation baskets. That has forced policymakers to take less dovish monetary policy views, with rate cuts expected only in a few select markets.

El Niño risk is back – are food prices the next inflation test?

We have previously highlighted upside risks to EM inflation, owing not only to higher energy prices but also increasing supply chain pressures. But another inflation risk now deserves closer attention: El Niño, which is typically associated with higher global temperatures and, in some regions, lower rainfall, raising the risk of supply disruptions across a broad set of crops.

Food prices had been an important disinflationary force over the past couple of years, largely reflecting the sharp leg lower in international food prices. That said, that tailwind is becoming less reliable, and if El Niño conditions strengthen through the summer, the next inflation test for EM could come from food prices.

According to NOAA (the US National Oceanic and Atmospheric Administration), the odds of a strong / very strong El Niño has been picking up, particularly for the second half of the year. A strong El Niño could potentially impact the crops of some key products such as rice and grains, which are already rising.

Our calculations suggest that there is some correlation between the Oceanic Niño Index, which measures the anomalies in sea temperatures, and oil-adjusted agricultural prices, implying that a stronger El Niño episode could lead to another round of upside pressure on food prices.

True, the inflation impact may not be immediate given the lead-lag relationship between El Niño, international food prices, and food inflation. But if El Niño strengthens through the summer, pressure could become more visible in H2 2026 and extend into 2027, complicating the monetary outlook for EM economies where food has a large weight in CPI baskets.

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