Goldman Sachs assesses El Nino's potential impact on euro area inflation

Overview

This Goldman Sachs European daily macro report focuses on the impact of the 2026 El Nino on global food commodity prices and euro area inflation. The report notes that NOAA has confirmed the formation of El Nino and that the probability of a "very strong" event by year-end is at a historical high. Because El Nino may cause weather disruptions such as droughts, floods, and storms, and further affect global harvests, the report mainly estimates the pass-through from food commodity prices to euro area consumer food prices and overall inflation.

Core views

The core conclusion is that the impact of El Nino on global food commodity prices is relatively clear and lagged, but the pass-through to consumer prices is more moderate and uncertain. Goldman Sachs estimates that a 1.0°C El Nino shock could raise its food commodity composite by 9.55% cumulatively; under a 1.65°C warming scenario corresponding to a "very strong" 2026 El Nino, cumulative food commodity price gains would be about 15.8%, fully reflected by 2028H2. This commodity shock is expected to raise the euro area FAT price level by 1.3% and contribute roughly 0.1 percentage point of upside to overall inflation in the one to two years after the shock.

Analysis framework

The report combines climate event probabilities, central bank and academic literature, the ECB local projection method, and Goldman Sachs' proprietary food commodity composite for estimation. It first assesses the shock from El Nino to wholesale food commodity prices, then uses a simple VAR framework to estimate the effect of food and energy commodity price changes on euro area food, alcohol and tobacco prices, and finally converts this into the contribution to overall inflation.

Methodology notes

• Macro inflation and climate shocksLocal projection framework

  Lagged pass-through from El Nino temperature shocks to food commodity prices

  The report replicates the ECB's local projection analysis and controls for the global business cycle, fertilizer prices, and energy prices to estimate the dynamic impact of a 1.0°C sea surface temperature anomaly on food commodity prices.

• Inflation pass-throughSimple VAR framework

  Joint impact of food and energy commodity prices on euro area FAT inflation

  The report uses a simple VAR to estimate the pass-through of food commodity shocks to euro area food, alcohol and tobacco consumer prices, and from that infers the contribution to overall inflation.

• Commodity-level analysisCommodity-specific response estimation

  Differences in sensitivity of different agricultural products to El Nino

  The report notes that coffee, oats, and corn show a more pronounced positive response to El Nino warming, while soybeans and wheat show smaller responses, and cocoa and rice are estimated to respond negatively, but the results are highly sensitive to whether post-2023 price changes are included.

Asset mapping & comparison

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

• Global food commodities

  Directly affected by El Nino weather shocks

  Strengths

  The direction of the shock is relatively consistent across the literature and models, and the price upside has a clear lagged transmission mechanism.

  Weaknesses

  The specific magnitude depends on crops, regions, and harvest cycles, and estimation uncertainty is relatively high.

  Comparison

  A 1.0°C shock is estimated to bring a 9.55% cumulative increase; the strong 2026 event scenario translates into a 15.8% cumulative increase.

  Risks

  Weather paths, fertilizer supply, logistics bottlenecks, and structural price changes after 2023 may alter the estimated results.

• Euro area FAT prices

  Pass-through from food commodity costs to consumer prices

  Strengths

  Food prices have an important influence on inflation expectations and consumer confidence.

  Weaknesses

  Pass-through to consumers is weaker than commodity price moves and conclusions vary considerably across studies.

  Comparison

  The report estimates that the FAT price level rises by 1.3%, far below the 15.8% cumulative shock to food commodity prices.

  Risks

  Retail margins, policy intervention, exchange rates, energy prices, and supply chain changes may weaken or amplify pass-through.

• Overall euro area inflation

  Food price increases create a moderate upside contribution

  Strengths

  The direction of the shock is biased toward lifting overall inflation, with the time window concentrated in the first one to two years after the shock.

  Weaknesses

  The contribution is small, expected to be only around 0.1 percentage point.

  Comparison

  About +0.1 percentage point in the first year and about +0.13 percentage point in the second year.

  Risks

  If energy prices are also affected or second-round pass-through from food price expectations strengthens, the actual inflation impact could exceed the report's food-channel estimate.

Key data

• NOAA-assessed probability of El NinoClose to 100%Probability of an El Nino occurring by the end of 2026.
• Probability of a "very strong" El Nino62%Significantly above the unconditional historical baseline of 7.9%.
• Impact of a 1.0°C shock on the food commodity compositeCumulative peak increase of 9.55%Reached around month 22, with persistent effects even after three years.
• Temperature increase corresponding to the strong 2026 event1.65°CAssumes the ONI anomaly peaks at 2.5°C, versus the current 0.5°C.
• Food commodity price increase under the scenario15.8%Translated from the 1.65°C warming scenario and expected to be fully realized by 2028H2.
• Impact on euro area FAT price levelIncrease of 1.3%Most of the effect is realized within the first 24 months.
• Impact on overall inflationAbout +0.1 percentage point in the first year and about +0.13 percentage point in the second yearThe full effect may not be fully visible in the data until 2030H2.

Impact & implications

For investment and macro assessment, the report suggests that food prices could become an upside disturbance in the euro area disinflation process, especially given that food inflation remains important for inflation expectations and consumer confidence. The scale of the effect is not large enough to change the entire inflation framework, but it could delay the decline in inflation, affect central bank communication, and increase attention on agricultural supply chains, fertilizer supply, and abnormal weather.

Risks

• The actual strength and duration of El Nino could be lower or higher than NOAA's current probability scenario.
• Pass-through from food commodity prices to consumer prices is highly uncertain, and the literature is not fully consistent on the impact on overall euro area inflation.
• The report mainly focuses on the food commodity channel and does not make a directional judgment on how El Nino may affect energy commodity prices.
• Agricultural price volatility after 2023 may imply structural changes in historical relationships, weakening model stability.
• Fertilizer supply disruptions caused by Middle East tensions may amplify the sensitivity of agricultural output to abnormal weather.

What to watch

• Further updates from the NOAA Climate Prediction Center on ONI anomalies and El Nino intensity.
• Divergence in prices of key agricultural products such as coffee, oats, corn, soybeans, wheat, cocoa, and rice.
• Whether global fertilizer supply, energy prices, and logistics bottlenecks amplify food supply shocks.
• Whether euro area food, alcohol and tobacco prices show the model-estimated pass-through within 24 months.
• Whether euro area inflation expectations and consumer confidence become more sensitive to rising food prices.