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- El Niño will be another shock that could trigger hotter inflation, Deutsche Bank warns.
- A strong El Niño could disrupt food, energy, and shipping, sending consumer prices spiking.
- Volatile weather could amplify upward pressure on prices from the Iran-war oil shock.
El Niño is poised to cause the next big inflationary shock to the global economy, Deutsche Bank says.
In a note to clients on Monday, the bank warned that a particularly intense warming phenomenon in the Pacific Ocean could be on the way this year. When paired with other existing inflationary forces, the weather event could exacerbate consumer price growth, the bank said.
"El Niño cycles typically repeat every few years with irregular frequency," Henry Allen, a macro strategist at the bank, wrote in the note. "However, today's episode is particularly concerning because forecasts suggest it will be a very strong one, ranking among the most serious in recent history."
El Niño is part of a cyclical warming and cooling pattern in the Eastern Pacific. Since it brings warmer waters, the Pacific jet stream moves further south, which affects weather patterns on land all around the world.
Historically, it has meant higher instances of flooding, temperature swings, droughts, and a larger potential for diseases to spread, Deutsche Bank said. Food production, hydropower, and shipping can therefore be disrupted.
For example, in 2024, the phenomenon led to low water levels in the Panama Canal, negatively impacting shipping rates. In many prior instances, crops and livestock have been damaged by flooding and droughts. All of these supply disruptions tend to drive consumer prices up.
A particularly bad El Niño this time around would come amid an oil price shock, with the US-Iran war ongoing.
"A very strong El Niño event would be another negative supply shock when the global economy has limited room to absorb one," Allen said. "The combination of higher food and energy prices will mechanically raise inflation, and broader supply-chain disruption risks creating further price pressures when the Strait of Hormuz has already been blocked."
Allen drew a parallel between today and the 1970s, when an oil shock and El Niño teamed up to send inflation higher. He warned that environments like this can lead to prolonged periods of inflation and raise consumers' inflation expectations, which can manifest in markets through rising interest rates.
In June, inflation rose 3.5% year-over-year, down from 4.2% in May but still above the Federal Reserve's target of 2%.
The US Climate Prediction Center has assigned a 73% chance that this year's El Niño hits its "strong" threshold in the July-September window, and an 81% of being "very strong" from October-December, the bank said.
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