JPMorgan Puts 81% Odds on Super El Niño as Fed Eyes September Rate Move
Compounding weather, fertilizer and energy cost pressures threaten to push global food inflation up to 1.5%, complicating the Fed's easing path heading into September.
Policymakers at the Federal Reserve are prepared to act on rates in September (2026-09) if the inflation outlook fails to improve, according to people familiar with the matter. Markets on Monday (2026-08-31) offered no softening of the commodity backdrop shaping that calculus. NYMEX Henry Hub front-month gained 1.04% to $2.92/MMBtu on the session, ICE Brent crude front-month held at $90.58 per barrel, and the VIX climbed 5.27% to 15.18.5
The Fed's concern extends beyond energy alone. JPMorgan warned on Friday (2026-07-24) that a "super" El Niño colliding with higher energy prices represents a compounding inflation threat, with the bank putting the probability of the current El Niño intensifying into a "very strong" or "super" event at 81% by year-end. Conditions carry a 97% probability of persisting into 2027.4
The food inflation arithmetic is specific. Layer $100 oil onto tighter diesel supplies, more expensive fertilizer, higher transportation costs and elevated packaging costs, and JPMorgan estimates the increase in food inflation could reach 1.3% to 1.5%. Even without the full oil-shock amplification, the bank puts the El Niño's peak contribution to global food inflation at about 0.7 percentage points.4
Emerging markets will absorb most of it. Food's larger share of household spending in developing economies means the distributional shock runs steeper than headline numbers suggest, JPMorgan said.4
Natural gas feeds directly into that food cost chain through fertilizer. NYMEX Henry Hub front-month settled at $2.96/MMBtu on Friday (2026-05-15), up 7.4% over the week of May 11 (2026-05-11), driven by expectations of hotter weather, stronger power-sector demand and resilient LNG exports. Weekly LNG vessel departures that week reached 141 billion cubic feet, up 26 billion cubic feet week-on-week despite maintenance at several export facilities. Gas at these levels raises ammonia and urea production costs, which farmers absorb in their input bills.1
The energy price surge that preceded those gas moves was set off in part by Middle East escalation. Oil broke through $100 per barrel in the week of July 20 (2026-07-20), Rigzone reported, touching off a broader inflation scare that pushed UK gilt yields to their longest streak of daily closes above 5% in nearly two decades.5
Mexico's experience shows how the food-water-energy nexus tightens under El Niño stress. The Cutzamala reservoir system, which supplies roughly a quarter of Mexico City's water, fell to just 27% of capacity during the El Niño before recovering to 67.7% by early June, a seven-year seasonal high. The Banco de Mexico cut its benchmark rate to 6.5% in May and signaled the easing cycle had likely run its course, citing weak activity and a resilient peso. The central bank's room to ease further is now constrained by the same inflation dynamics complicating the Fed's position.3
Global grain markets have offered some relief: prices have fallen 27% from their peak, the Economist reported. But supply indicators at the International Food Policy Research Institute in Washington had been flashing alerts for all major grains, including rice, which rarely triggers supply-concern signals. The structural constraints underpinning the earlier spike have not fully resolved.2
The September Fed meeting arrives with the commodity complex still unsettled. ICE Brent crude front-month held at $90.58 per barrel as of Monday (2026-08-31), below the $100 break from July but not far enough below to meaningfully ease input cost pressure on food producers and transporters. JKM Asian LNG was at $23.17/MMBtu, reflecting sustained regional demand in the markets JPMorgan identifies as most exposed to the food inflation pass-through. How quickly fertilizer input costs work through into next season's planting decisions — and whether El Niño delivers the yield disruption the models now consider highly probable — will set the scope of the inflation problem the Fed confronts in the months that follow its September meeting.4,5