Investment bank Jefferies has warned that the “Super El Nino” driving record temperatures across Europe could add a full percentage point to inflation this year.
An analysis by Jefferies found that severe weather triggered by the meteorological phenomenon will pose “an inflationary threat” and push food prices up by between five and nine per cent across the UK and Europe.
Chief European economist Mohit Kumar said the pressure on commodity prices from the US-Iran war makes the situation worse, writing that food and related products account for around 13 per cent of the consumer basket in Europe.
“The severe weather impact could raise inflation by between 0.5 per cent and one per cent next year,” Kumar wrote, flagging the compounding effect of geopolitical and climate pressures acting simultaneously on supply chains.
El Nino, meaning little boy in Spanish, is a natural climate event occurring every two to seven years whereby sea temperatures in the Pacific Ocean become unusually warm, typically causing hotter weather across the globe.
This year’s extreme iteration has been the predominant driver of Europe’s unprecedented spell of hot, dry weather, triggering a wave of warnings about food prices from Britain’s retailers and farmers.
Farmers have said this year’s crop yield was the worst they have known, raising serious concerns about the knock-on effects for grocery prices and the broader cost of living.
The Bank of England has been placed on notice, with two members of its Monetary Policy Committee raising El Nino as something they plan to monitor ahead of future interest rate decisions.
Deputy governor Dave Ramsden said the phenomenon “may add to inflationary pressures”, while external member Megan Greene said it constituted a looming “supply risk” that policymakers cannot afford to ignore.
Jefferies’ warning adds a further complication for the Bank, which has struggled to rein in price pressure after a barrage of supply shocks, with inflation only hitting the official two per cent target for two months since 2021.
Economists had previously predicted that annual price rises would ease to two per cent, precipitating a fall in interest rates to roughly three per cent, but the US’s protracted activity in Iran upended those forecasts.
Liliana Danila, chief economist at the Food and Drink Federation, said it was “not clear” what the full impact of heatwaves would be, although food manufacturers were braced for production of key commodities such as cocoa, coffee, sugar, and rice to drop.
“UK food and drink manufacturers have already been grappling with rising costs as a result of the war in Iran, so the impact of extreme weather and reduced crops here and around the world will be an additional concern,” Danila said.