When it comes to inflation, one-off supply-side price shocks typically do not amount to much in the way of a second-round inflationary threat; hence, the proper response from monetary policymakers in developed market economies is to look through them. Yet, the problem we are seeing today is that the economy continues to be hit with one supply shock after another (COVID, the Russia-Ukraine war, tariffs, immigration restrictions, boats stuck in canals or hitting bridges, and the war with Iran), and now we are potentially also facing another new threat in the form of a “super El Niño” (as well as potentially another round of tariffs when the next USMCA deal is agreed on in the coming weeks). While economists and central bankers might see these as individual, separate episodes, the reality for consumers is that it all becomes indistinguishable from persistently higher inflation.
In this Economics Weekly, Richard de Chazal looks at the potential impact of El Niño and how central bankers should be thinking about it.