There’s a new threat on the horizon that could soon sweep the world, raising food and energy prices and disrupting supply chains at a time when the world is least able to cope.

It’s called El Niño and forecasts are calling for the one of the strongest on record in the fourth quarter of this year — in other words a “super El Niño.”

“That matters because El Niño events can act as a multi-dimensional supply shock, with a causal link to higher food and energy prices, alongside broader supply-chain disruption,” said Henry Allen, macro strategist with Deutsche Bank Research Institute in a report out this week.

That’s a problem at any time, but it is especially problematic now because the Iran war has already disrupted supply chains and pushed up inflation by blocking the Strait of Hormuz.

“A very strong El Niño event would be another negative supply shock, at a point when the global economy has limited room to absorb one,” he said.

El Niños happen when unusually warm sea surface temperatures in the eastern Pacific Ocean change the course of jet streams and weather patterns.

They are characterized by higher global temperatures and a higher frequency of natural disasters ranging from flooding in North America to drought in Australia and Asia.

“For markets, an El Nino is capable of hitting agricultural production, hydropower, shipping, and even has effects on public health and political stability. In other words, it operates as a multi-channel supply shock,” said Allen.

Though El Niño cycles repeat every few years, forecasts are predicting that this one will rank among the most serious in recent history. The U.S. Climate Prediction Centre warned this event could the one of the strongest in 75 years with a high chance it reaches “strong” thresholds in July to September and “very strong” in October to December.

A “very strong” El Niño is capable of shifting rainfall and temperature patterns over multiple regions at the same time.

This drives up food prices by damaging crops, killing livestock and disrupting shipping. Lower rainfall in some regions can impede the electricity generation of hydro electric dams as higher temperatures raise the demand for power.

El Niños also disrupt supply chains. In the last event in 2023-24, a 30 per cent drop in rainfall forced the restriction of ships passing through the Panama Canal.

The combination of higher food and energy prices threatens to ramp up inflation already under pressure from the closure of the Strait of Hormuz in the ongoing Iran conflict, said Allen.

Conditions today are reminiscent of the 1970s, when a series of unrelated supply shocks, including an El Niño, kept inflation high, he said. Even though the shocks themselves were temporary, their frequency caused inflation expectations to become entrenched and policy makers were forced to react.

“Given the forecasts for the strength of this El Nino, this will be an important event to look out for over the months ahead,” he said.

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Bank of Canada rate hikes looked even further away Monday after the country’s inflation rate slowed more than expected.

The consumer price index rose by 2.8 per cent in June , down from the 3.2 per cent pace the month before and lower than the 2.9 per cent expected by economists.

The average of the median and trim measures of core inflation that the central bank favours came in at 1.85 per cent, the lowest since September 2020 and the first time the metric has fallen below 2 per cent in nearly six years.

“June’s inflation report reinforces our view that the Bank of Canada can remain on the sidelines for quite some time,” said Leslie Preston, senior economist at TD Economics.

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.

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