Super El Niño and oil: Double whammy for food prices

Research evidence excerpt

Super El Niño and oil: Double whammy for food prices

rate dynamics, policy responses, and food weights in CPI bas-

can become, with coffee, sugar and rice prices rising between

kets can materially alter both the timing and magnitude of

30% and 100% during that episode.

pass-through. As a result, aggregate correlations obscure eco-

nomically significant local effects.

The pass-through from commodity prices to consumer infla-

tion remains highly dependent on local conditions. Exchange

To isolate the underlying relationship, we estimate local pro-

rates, food import dependence, food weights in consumer bas-

jections following Jordà (2005), treating the Oceanic Niño

kets and policy responses all influence transmission. Econo-

Index (ONI) as an exogenous weather shock and tracing its

mies with weaker currencies and more limited policy buffers

dynamic impact on food inflation across 29 economies using

generally experience faster and more complete pass-through,

monthly data from 2005. Following the NOAA convention,

while inventories, subsidies and trade measures can partly

we define El Niño intensity as the excess of the ONI above

cushion the shock.

the 0.5°C threshold and control for La Niña episodes, oil pric-

es, exchange rates, fertiliser prices, lagged inflation dynam-

The ongoing Middle East crisis has driven a sharp increase in ics, and country-specific food inflation breaks.

select input costs across the food production chain. Three key

commodities that moved sharply higher and have broad-based

The results suggest that a move from the minimum El Niño

importance are diesel, fertiliser and polyethylene (used for

threshold of 0.5°C to a very strong 2.5°C episode lifts global

packaging). Unlike El Niño, which primarily works through

food inflation by 0.7%-pt at its peak.