July 24, 2026
Weather–Energy Overlap Reopens the Inflation Question
A potential convergence of a strengthening El Niño with a supply‑driven oil shock is emerging as a macro risk that could slow the ongoing decline in global inflation next year. JPMorgan estimates the overlap could add roughly 0.3 percentage points to worldwide headline inflation if the Middle East conflict keeps energy prices elevated while weather disrupts supply chains and demand patterns.
The bank places an 81% probability that the current El Niño intensifies into a “very strong” or “super” event by year‑end, and a 97% probability that El Niño conditions persist. In parallel, the possibility of tighter oil supply stemming from regional conflict risk has already pushed energy higher in recent months, leaving headline inflation more exposed to fuel‑related pass‑throughs.
Transmission Channels to Prices
El Niño typically alters temperature and precipitation patterns, creating heat and drought in some regions and flooding in others. These shifts can strain harvests, complicate transport and logistics, and lift electricity demand during extreme heat. When combined with higher crude and refined‑product costs from supply disruptions or precautionary stocking, the price impulse can broaden beyond energy into food and services.
In this setup, inflation dynamics hinge on two moving parts: the depth and duration of the weather event, and the tightness of oil supply. A stronger or more persistent El Niño increases the risk of agricultural and power‑market volatility, while any renewed disruption in Middle East flows would amplify the fuel component. JPMorgan’s 0.3‑percentage‑point estimate frames the potential uplift to headline inflation rather than a base case, but it underscores the sensitivity of disinflation to exogenous shocks.
Policy and Portfolio Considerations
A slower retreat in headline inflation would complicate the timing and extent of monetary easing. Central banks have focused on core measures, yet headline swings influence inflation expectations and real incomes, particularly when driven by fuel and food. Even a modest uplift could extend the interval before policy makers are confident that inflation is durably back to target.
For markets, the intersection of climate variability and geopolitically driven energy supply adds a layer of uncertainty to growth, profits and real yields into next year. Liquidity, inventory levels in energy and agriculture, and the resilience of global supply chains will shape how much of the shock transmits to consumers versus being absorbed along the value chain.
Periods of elevated inflation uncertainty have historically coincided with greater interest in assets held off‑balance‑sheet, such as allocated physical bullion that carries no issuer or credit exposure.
