Oil prices, fertilizers, and El Nino combine to create renewed upside pressure on ASEAN food inflation

Overview

This report examines how the oil price shock triggered by the conflict in the Middle East, fertilizer supply pressures, and a potentially strong El Nino event could jointly affect ASEAN food inflation. The report argues that ASEAN food prices exhibit strong synchronization, food has a high weight in the CPI basket, and most economies are exposed to external shocks through food imports, energy costs, fertilizer dependence, and palm-oil biofuel demand.

Core views

The core view is that ASEAN food inflation faces upside risks over the coming months. Higher oil prices initially affect transportation- and fuel-related CPI items, then pass through to food prices via agricultural inputs, logistics, and the food chain; higher fertilizer prices raise farm input costs; and if a strong El Nino emerges in late 2026 or early 2027, it could add a new supply shock before the cost shock has been fully absorbed. The report estimates that the three types of shocks combined could raise ASEAN food inflation by an additional average of approximately 2.1 percentage points after 12 months.

Analysis framework

The report first assesses ASEAN's vulnerability based on trade structures, food CPI weights, and commodity linkages, then uses principal component analysis to examine the synchronization of regional food inflation and local projections to estimate the dynamic effects of oil prices, fertilizer prices, and El Nino on national food CPI. It then feeds commodity-team forecasts and a NOAA probability-weighted El Nino path into the model to estimate additional food inflation pressure over the next 6, 12, and 18 months.

Methodology notes

• EconometricsLocal projections

  Uses the local projection method of Jorda 2005 to directly estimate the response of food CPI to shocks at different future horizons.

  This method does not require specification of a complete multivariate system and is suitable for estimating the transmission paths of oil, fertilizer, and weather shocks across different months.

• Factor analysisPrincipal component analysis

  Uses the first common factor to measure the regional synchronization of ASEAN food inflation.

  The report states that the first common factor explains approximately 70% of regional food inflation variation, indicating that ASEAN food prices often move in the same direction during major shocks.

• Climate indicatorRONI

  Uses the Relative Oceanic Nino Index to measure El Nino conditions.

  The report uses RONI rather than the standard ONI to better capture ENSO conditions relative to recent warming trends, and represents El Nino shocks through monthly changes.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ASEAN interest rates and local-currency assets

  Higher food inflation could delay monetary easing or raise inflation risk premiums.

  Strengths

  If policy effectively cushions the shock, some of the pressure from inflation shocks on interest rates and exchange rates may be absorbed.

  Weaknesses

  Food has a high weight in the CPI basket, so shocks can readily affect household inflation perceptions and central-bank communication.

  Comparison

  Indonesia, the Philippines, and Thailand are relatively more sensitive, while the estimated impact on Singapore and Malaysia is smaller.

  Risks

  Further oil price increases, a stronger-than-expected El Nino, or insufficient policy buffers could all amplify inflationary pressure.

• Crude oil and energy-related assets

  Oil prices pass through to food prices via transportation, fuel, and agricultural input costs.

  Strengths

  Higher oil prices typically benefit upstream energy revenues and related commodity prices.

  Weaknesses

  They create cost shocks for food-importing countries and net energy-importing economies.

  Comparison

  Oil price pass-through is more stable and statistically significant than fertilizer and El Nino shocks.

  Risks

  The conflict in the Middle East, shipping bottlenecks, or supply disruptions could keep oil prices elevated for longer.

• Fertilizers and agricultural inputs

  Disruptions to fertilizer supplies and higher prices raise farm input costs and push food prices higher with a lag.

  Strengths

  Higher prices could improve revenues for some fertilizer producers.

  Weaknesses

  Cost pressures are greater in agricultural economies highly dependent on fertilizer imports; Thailand relies on imports for more than 90% of its fertilizers.

  Comparison

  Fertilizer pass-through is smaller than oil price pass-through, but its impact accumulates gradually.

  Risks

  Shipping disruptions, higher energy costs, or supply-chain tensions could continue to push fertilizer prices higher.

• Palm oil and edible oil markets

  Higher oil prices encourage Indonesia, Malaysia, and Thailand to increase biodiesel blending ratios, boosting demand for palm oil for energy use.

  Strengths

  Biofuel demand can support palm oil prices and related producer revenues.

  Weaknesses

  The diversion of supply toward energy use reduces edible oil availability and may intensify food price pressures.

  Comparison

  Malaysia and Indonesia appear to have food trade surpluses, but become net food importers when palm oil is excluded.

  Risks

  Palm oil supply could come under further pressure if El Nino causes insufficient rainfall.

Key data

• Food inflation synchronizationApproximately 70%Principal component analysis shows that the first common factor explains approximately 70% of ASEAN food inflation variation.
• Oil price shock transmissionA 10% increase in oil prices corresponds to approximately +0.3 percentage points in food CPI after 12 monthsThis is the regional average estimate; oil price pass-through is the clearest and most stable of the three shocks.
• Fertilizer shock transmissionA 10% increase in fertilizer prices corresponds to approximately +0.2 percentage points in food CPI after 12 monthsThe impact of fertilizers is smaller than that of oil prices but accumulates over time.
• Food inflation pressure from combined shocks+1.0 percentage point after 6 months; +2.1 percentage points after 12 months; +2.0 percentage points after 18 monthsAdditional pressure relative to the no-shock baseline path, not a forecast of total food inflation.
• Recent commodity shocksBrent approximately 46% higher than in February; urea prices approximately 63% higher than in FebruaryAs of the end of May, even after retreating from their April peaks, oil and urea prices remained significantly above February levels.
• Weather path assumptionRONI could rise to approximately 1.7°C by the end of 2026NOAA models indicate a significant risk of strong El Nino conditions around November 2026 to January 2027.
• Cross-country risk differentiationHigher risks in Indonesia, the Philippines, and Thailand; more manageable in Singapore and MalaysiaThe regional average masks significant differences at the country level.

Impact & implications

The macro implication is that food price shocks could prolong ASEAN inflation persistence and affect central-bank easing cycles, real incomes, fiscal subsidy burdens, and food trade policies. For markets, attention should be paid to the second-order effects of oil and fertilizer prices on CPI expectations, yield curves, local-currency exchange rates, and food- and agriculture-related assets. Policy tools can cushion pass-through, but may also create fiscal costs, supply distortions, or pressure for subsequent price adjustments.

Risks

• The conflict in the Middle East or shipping bottlenecks could push oil and fertilizer prices higher.
• El Nino intensity in late 2026 to early 2027 could exceed expectations, causing a more pronounced agricultural supply shock.
• Insufficient policy buffers, including food inventory releases, import liberalization, subsidies, and price controls, could lead to greater pass-through to end-consumer prices.
• Although policy intervention can lower short-term inflation, it may increase fiscal burdens, cause shortages, or delay price adjustments.
• The estimated El Nino effect in the model is not sufficiently precise, and transmission varies substantially across countries.

What to watch

• Brent crude oil prices, shipping routes, and developments in the conflict in the Middle East.
• Urea and other fertilizer prices, as well as restrictions on major fertilizer exports and transportation.
• Monthly NOAA updates on RONI and El Nino intensity.
• Food CPI components in Indonesia, the Philippines, Thailand, Singapore, and Malaysia.
• Changes in food inventory releases, import quotas or tariffs, subsidies, and price-control policies across countries.
• The impact of palm oil prices, biodiesel blending policies, and rainfall anomalies on production.