El NiñO and World Primary Commodity Prices: Warm Water or Hot Air?

Abstract

This paper examines the historical effects of El Nino on world prices and economic activity. Although the primary focus is on world real non-oil primary commodity prices, the effects on G-7 consumer price inflation and GDP growth are also considered. This paper has several distinct advantages over previous studies. First, several econometric models are estimated using fairly broad measures of prices and economic activity. Second, the models include continuous measures of El Nino intensity (sea surface temperature and sea-level air pressure anomalies in the Pacific Ocean) rather than dummy variable measures. Finally, confidence intervals are constructed for all estimated effects of El Nino on world prices and economic activity. ; The analysis indicates that El Nino has economically-important and statistically-significant effects on world real commodity prices. A one-standard-deviation surprise in El Nino, for example, raises real commodity price inflation about 3-1/2 to 4 percentage points. Moreover, El Nino appears to account for over 20 percent of commodity price inflation movements over the past several years. El Nino also has some explanatory power for world consumer price inflation and world economic activity, accounting for about 10 to 15 percent of movements in those variables.