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

This paper examines the historical effects of the El Niño-Southern Oscillation (ENSO) cycle on world prices and economic activity. The primary focus is on world real non-oil primary commodity prices, although 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 ENSO 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 ENSO on world prices and economic activity. The analysis indicates that ENSO has economically important and statistically significant effects on world real commodity prices. A one-standard-deviation positive surprise in ENSO, for example, raises real commodity price inflation about 3.5 to 4 percentage points. Moreover, ENSO appears to account for almost 20% of commodity price inflation movements over the past several years. ENSO also has some explanatory power for world consumer price inflation and world economic activity, accounting for approximately 10% to 20% of movements in those variables.