The next inflation storm? Food, fertiliser and El Niño

From an energy shock to a food price shock?

The rise in energy prices and closure of the Strait of Hormuz has potentially stirred the embers of the next inflation spike – one centred on food prices. As we move into the second half year, we can see that input costs in the agricultural sector (primarily fuel and, relatedly, fertiliser cost) have also been driven up. This is occurring against a backdrop of more frequent extreme weather episodes reflecting climate change, added to which we can now throw in an El Niño event. These factors have the potential to reinforce each other when it comes to higher food prices.

This links with the Spikeflation theme discussed at length by Royal London Asset Management’s multi asset head Trevor Greetham who points to a number of factors that indicate more frequent inflation shocks in the coming years – from a changed geopolitical environment to demographics.

Fertiliser a key transmission channel

The cost and availability backdrop for fertiliser deteriorated with the conflict in the Middle East and it seems likely to see less food harvested in the coming year or so. Higher costs for fertiliser for example can mean that, for some farms, it might not be financially viable to spread fertiliser, resulting in lower crop yields. Prices of urea, the most widely available nitrogen fertiliser, as of mid-May has risen more than 65% since the end of February, and nitrogen fertiliser prices in the EU were up 40% from levels seen in December [1]. Even here in the UK, farmers were reportedly considering planting less next season given the increase in costs [2]. Multiplied across regions, such calculations may lead to smaller harvests and higher food prices ahead, with the effects likely to be felt most heavily by vulnerable parts of the population and in low-income economies.

What is El Niño and will we get one?

El Niño is a powerful climate pattern typically occurring every two to seven years, the last being in 2023/24. The US National Oceanic and Atmospheric Administration (NOAA) declared that El Niño conditions are underway again with an 81% chance of a “very strong” El Niño during October-December 2026. Strong El Niño events make different parts of the world more likely to experience extreme heat, high rainfall and cold winters and most strongly affect the Americas, Asia and Australasia (rather than Europe for example). Effects are also likely to interact with climate change (which you could think of as a structural factor compared to a cyclical one in the case of El Niño) and already higher energy prices and input costs for food.

What do El Niño and extreme weather events mean for prices?

There can clearly be lags between weather-related factors and impacts on agricultural prices given the gap between planting and harvest. The effects can also differ significantly product to product. However, although El Niño has varying effects on different crop yields, there is (unsurprisingly) evidence that El Niño events boost food prices. In an Economic Bulletin article from 2023, the ECB pulled together evidence including one study suggesting that El Niño episodes have an upward impact of around 5% on global non-energy commodity prices lasting six to 16 months. They pointed to further evidence suggesting a 9% impact peaking after 16 months for strong El Niño episodes. The effects tended to impact soybeans, corn and rice the most. IMF researchers found that the impact of El Niño on inflation is upward for most economies (~0.1-1.0pp range), with the impact strongest where food is a higher proportion of the consumer basket. Interestingly, they also found a sustained positive effect on oil prices too (attributed to higher demand).

The effects of extreme weather events can move well beyond food prices. Episodes of extreme heat and drought, for example, can also have effects (again with cost/price implications) on the viability of transport routes (e.g., low water levels of river and canals), productivity (uncomfortable working conditions and ill health) and electricity production (less hydroelectricity).

Could the impact of a food price shock on inflation be worse given the backdrop?

Yes, for several reasons:

• This would be hot on the heels of an energy price shock and throwing El Niño into the mix this year may add to a sense of more frequent supply shocks. Recurrent price shocks likely raise the risk that inflation expectations rise and make it tougher for central banks to wrestle inflation back to target sustainably. Food prices are anyway more salient for setting inflation expectations where consumers may be more attuned to the price of certain food items, and what their average weekly food bill is, and notice when they rise.
• Our work suggests that second round effects from oil price shocks (i.e. more persistent inflation) are more likely when the economy has recently experienced high inflation and when inflation expectations are already elevated. The same may be true for food prices and both conditions hold to some extent in the UK for example.

What about economic growth – who will be hit the worst?

Food price shocks are likely to be negative for activity growth, leaving consumers with less to spend on other things and where many developed economies are net importers of agricultural commodities (notably the UK, Japan and, to a lesser degree, the EU).

El Niño events in isolation aren’t necessarily bad for growth in all economies. The impacts are complex, with heavier than usual rainfall being helpful in some areas and for some crops for example. Work done by IMF researchers found some evidence of positive effects in the US, but found evidence of short-lived negative effects in Australia and Japan, for example. For the US, they linked typical El Niño patterns observed to that point (2015) to wetter weather in California and the south, warmer winters in the north east, fewer tornados in the mid-west and fewer hurricanes on the east coast.

However, this El Niño event won’t be in isolation, but will follow an energy price shock, higher agricultural input costs/reduced availability and occurs against a background of generally more frequent extreme weather events. Farmers, food producers and retailers will likely have already seen margins shrink and protecting consumers from price rises may not be possible. It is plausible that outcomes for growth are generally more detrimental against that backdrop, via the impact on consumer spending power or supply as the energy and supply shock compound.

Broader effects of higher food prices are also a risk, especially for some emerging markets, including reduced policy flexibility where food inflation has more direct social and fiscal implications. Higher food prices have the potential to be a broader macro and stability issue. On a more positive note, partly as a result, higher food prices could also act as a catalyst for more investment in climate adaptation, e.g. water infrastructure and irrigation.

What does all this mean for central banks?

We think there is a good chance that this year’s energy price shock is followed by a jump in food prices reflecting the higher costs of inputs, the climate backdrop, and the probability of a strong El Niño event. A food price shock, like an oil shock generates tension for central banks – raising inflation but creating challenges for parts of the real economy (especially for consumers).

Given recent inflation history and the current backdrop, any food price spike may have a longer-lasting effect on inflation than it would have done say a decade ago. It may be much harder, therefore, for central banks to ‘look through’ it and might become a factor keeping central bank rates above neutral for longer.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

[1] https://www.bloomberg.com/news/articles/2026-05-13/eu-seeks-to-shield-farmers-from-war-induced-fertilizer-shock
[2] https://www.bbc.co.uk/news/articles/czx270zz5lqo