Board of Governors of the Federal Reserve System
International Finance Discussion Papers
EL NIÑO AND WORLD PRIMARY COMMODITY PRICES:
WARM WATER OR HOT AIR?
Allan D. Brunner
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El Niño and World Primary Commodity Prices:
Warm Water or Hot Air?
Allan D. Brunner*
Abstract: This paper examines the historical effects of El Niño 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
Niño 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 Niño on world prices and economic activity.
The analysis indicates that El Niño has economically-important and statistically-significant
effects on world real commodity prices. A one-standard-deviation surprise in El Niño, for example,
raises real commodity price inflation about 3-1/2 to 4 percentage points. Moreover, El Niño appears
to account for over 20 percent of commodity price inflation movements over the past several years. El
Niño 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.
Keywords: El Niño, commodity prices, business cycle fluctuations