Written by Suryaveer Singh
A growing body of research, including recent analysis from J.P. Morgan, suggests that El Niño – a naturally occurring climate cycle driven by fluctuations in ocean temperatures and atmospheric pressure across the central and eastern tropical Pacific – has moved from a background risk to a likely scenario for the second half of 2026. The case for watching it more closely is building.
The shift in probability has been swift. As recently as April, the National Oceanic and Atmospheric Administration (NOAA) put the likelihood of El Niño onset by mid-2026 at 61%. The May update revised that to 82%. J.P. Morgan puts the odds of the event reaching strong or very strong intensity at 67%, up from 51% just one month prior. Critically, their modeling shows that moving from a mild to a strong El Niño more than doubles the inflation impact, with effects typically building four to eight months after onset – placing the economic pressure squarely in late 2026 and early 2027, precisely when several central banks are still working to bring inflation sustainably lower.
History offers useful context. Academic research finds that a normal El Niño tends to raise real commodity price inflation by around 3% in the six to twelve months following its emergence, with food the primary driver. IMF analysis puts the broader impact on headline inflation at between 0.1 and 1 percentage point across affected economies, with the largest effects in countries where food represents a significant share of the CPI basket.
The primary transmission mechanism is agricultural supply disruption. El Niño typically brings drought to India, Southeast Asia, and parts of Southern Africa. The commodities most at risk – rice, sugar, coffee, cocoa, and palm oil – are not peripheral markets. India is the world’s largest rice exporter and depends heavily on monsoon rainfall. Indonesia and Malaysia dominate global palm oil supply. Brazil is central to both coffee and sugar. Disruption across even two or three of these simultaneously would be meaningful for global food prices.
The monetary policy implications warrant attention, particularly for specific emerging market central banks. A supply shock of this kind cannot be solved through higher rates, but rising food prices feed into headline CPI, risk de-anchoring inflation expectations, and create pressure on central banks to act regardless. In India, Indonesia, and the Philippines – where food represents a meaningful share of the CPI basket – the pass-through is direct and fast. These central banks may find it difficult to deliver the rate cuts markets currently anticipate, leaving them in a difficult position: policy that does little to address the underlying problem, but still weighs on local bonds, currencies, and growth.
For investors, the main risks to monitor are upward pressure on soft commodity prices, potential delays to rate cuts in key Asian markets, and the broader drag on consumer purchasing power in food-sensitive economies.
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