The inflationary effects of the El Niño-Southern Oscillation

Abstract

In this paper we apply the wavelet approach and the GVAR methodology to investigate the effects of El Niño fluctuations on national inflation rates, global commodity prices and world oil prices. The focus of our analysis is on the inflation effects of “ENSO diversity”, measured as the central Pacific (CP) and eastern Pacific (EP) El Niño. Using quarterly data from c.1950 onward, we substantially extend the time span of existing studies. This allows us to observe a much larger number of ENSO cycles. The set of countries included in our study comprises countries directly affected by the El Niño, countries that are teleconnected with the El Niño variations and countries that are only indirectly affected by these processes via global economic linkages. The results from wavelet analysis display several key features. First, we observe an episodic relationship between ENSO variations and inflation for most countries, irrespective of whether they are directly impacted by ENSO or impacted via teleconnections. Second, the identification of CP and EP ENSO effects highlights the importance of ENSO diversity when analysing the inflationary effects of ENSO. Third, the periods of statistical significance encompass both El Niño and La Niña phases of the ENSO cycle. The GVAR framework used to estimate the magnitude of the effects of the ENSO cycle on national CPI inflation confirms that modelling the effects of ENSO diversity as captured by CP and EP ENSO measures matters for the identification of their complex nonlinear effects on national inflation rates.