“El Niño” and “La Niña”: Revisiting the impact on food commodity prices and euro area consumer prices

This paper challenges the prevailing assumption that the intensification of the weather phenomena known as El Niño and La Niña generally exert upward and downward pressures, respectively, on international food commodity prices that, in turn, affect consumer prices even in distant jurisdictions such as Europe. As regards the first point, we show that there are nuances that have to do with composition effects (the type of commodity) and sample periods (more recent decades present a different frequency of weather events, with producers having adopted mitigation strategies over time), in such a way that the impact is weaker nowadays and, in some cases, may even change sign (for some commodities, depending on the period of reference). With regard to the second point, and focusing on consumer price inflation in the euro area and its four largest constituent countries (Germany, France, Italy, and Spain), we show that it is crucial to account for the mitigating and sample-period-specific role of domestic agricultural policies (in the euro area, the European Union’s Common Agricultural Policy, CAP). To carry out our analysis, we construct a detailed database for the 1970–2023 period and use a local projections empirical framework. Among other results, we show that when using a sample period that starts at the time of the creation of the euro area (in the late 1990s), an intensification of El Niño actually decreases euro area headline inflation by about 0.3 percentage points (pp) after 12 months, while La Niña increases it by 0.6 pp over the same horizon. We explain our results on the basis of the aforementioned factors: composition effects, sample periods, and the CAP.