Pandemic-related shocks to demand and supply resulted in a sharp rebound in global commodity prices through 2021. This was further exacerbated by Russia’s invasion of Ukraine in early 2022 providing another shock to global commodity markets.

The effects of these surges are still evident in elevated global headline inflation numbers. But favorable base effects have begun to take hold, helping to cool global headline inflation (Chart 1). However, risks are emerging that could disrupt this process and lead global inflation to remain higher for longer.

Chart 1. Commodity base effects driving inflation

Source: Haver, abrdn, August 2023.

Tighter energy supply backdrop

Global energy supply is tight. Most recently, the threat of industrial action at Australian liquefied natural gas (LNG) export terminals triggered a spike across global LNG benchmarks, including Dutch Title Transfer Facility (TTF) prices (Chart 2). Australia's Wheatstone and Gorgon LNG facilities contribute almost 10% to global LNG supply, with potential spillovers across the energy complex.

Chart 2. Energy prices have been rising again

Source: Bloomberg, abrdn, August 2023.

A drop in shipments would further tighten markets ahead of the high demand during the Northern Hemisphere winter. That said, given the importance of the facilities, and progress in talks, prolonged strikes are unlikely. The crude oil rally started as early as June, supported by a combination of market deficit and positive economic sentiment. Moreover, Saudi Arabia implemented supply cuts of 1 mbd in July and August, leaving its oil supply at 9 mbd during this period. These cuts were extended into September. Over the past year, OPEC+ production cut announcements have not been a major driver of oil prices. But combined with resilient US economic data and growing optimism about the possibility of a soft landing, they have helped keep the market tight and support prices.

Asia has driven the recent recovery in oil demand

The outlook for China is also a key driver for energy prices. China's oil demand is currently at or near all-time highs according to Bloomberg estimates (Chart 3), with crude oil, LNG, and coal imports all sharply higher year to date.

Chart 3. Chinese oil demand supporting prices

Source: Bloomberg, abrdn, August 2023. Note: Total apparent Chinese oil demand is the combination of oil processing volume and net import of refined petroleum oil.

More recently, Chinese goods trade data, industry, and real estate disappointed. As such the strength in energy demand from stock building in oil and coal cannot be relied upon to sustain the energy price rally. However, travel related demand for fuel is likely to remain strong. We had previously flagged the potential for summer holiday travel to support jet fuel and diesel demand. Domestic air travel in China has recovered to pre-pandemic levels and international travel is making a steady recovery (Chart 4). Leading indicators point to a continued pickup in international travel over the summer months.

Chart 4. Chinese tourism recovery still underway

Source: Haver, abrdn, August 2023.

Moreover, the recent relaxation of visa rules for business travel and the removal of restrictions on Chinese group travel will likely help support international travel over the coming months. And a new agreement between the US and China is set to increase round-trip flights from 12 to 24 per week starting October 29. Admittedly, services between US and China had averaged 340 per week prior to the pandemic so the absolute level is still very subdued. Bringing this all together, we expect any further LNG price spikes to be limited and most likely temporary, but a higher range for crude prices ($80–$90/bbl) may persist through the summer travel season.

Relative to the negative commodity price base effects during 2023, the inflationary impact of this is likely to be quite limited, although it could slow the pace of disinflation (Chart 5) and the return to target-consistent inflation.

Chart 5. Higher oil prices won’t derail, but may slow disinflation trend

Source: Haver, abrdn, August 2023.

Political risks return to haunt agriculture prices Agriculture prices had stabilized this year following a turbulent period in response to the pandemic and Russia’s invasion of Ukraine. However, concerns around supply disruptions have risen again in recent months. In particular, since the launch of the Ukrainian counter offensive in June, Black Sea transit routes for agricultural commodities have become increasingly exposed to the conflict. Russia has withdrawn from the UN-brokered Black Sea grain deal, which allowed grain to leave blockaded Ukrainian ports and has thus far shown little interest in rejoining. Russia’s withdrawal from the deal is not hugely significant in and of itself. The deal had been functioning poorly in the months before its collapse and the majority of Ukrainian grain is now transported overland via European solidarity lanes.

With both sides now escalating the scope of the conflict, tail risks to grain supply are growing. Russia has increasingly targeted Ukrainian grain storage and export infrastructures along the Black Sea and the Danube, which have increased in importance as export routes.

Ukraine declared the waters around Russia’s Black Sea ports a “war risk area” from August 23 “until further notice.” The zone includes major Russian ports like Novorossiysk, Anapa, Gelendzhik, Tuapse, Sochi, and Taman. Ukraine recently conducted a drone strike on an oil tanker near Novorossiysk, signaling that it is willing to target Russian exports in retaliation.

El Niño risks ahead for food inflation

El Niño occurs every two to seven years when the sea surface temperatures warm above average, and air pressure drops over large parts of the Pacific Ocean. Chart 6 shows significant El Niño episodes can push food prices higher. The NOAA Oceanic Niño index is the official indicator for monitoring climate patterns. 1.5 degrees Celsius or larger increases in this indicator have been associated with strong El Niño events. These have happened once or twice a decade since the 1950s, most recently in 2009 to 2010 and 2015 to 2016. Risks are elevated this year, as climate scientists have warned of a particularly strong El Niño event developing.

Chart 6. Significant El Niño events can drive food inflation but other factors can prove an offset

Source: Haver,, abrdn, August 2023.

In 2009 –2019, El Niño and La Niña effects, alongside growing demand from emerging markets (EMs), contributed to higher food inflation. However, falling oil prices helped ease transport, fertilizer, and production costs, offsetting the El Niño impact. There are potentially strong repercussions in agricultural production across Latin America and Emerging Asia. In particular, India is vulnerable to an El Niño shock, given agriculture makes up 18% of its economic output and 42% of employment – higher than other major EMs.

Food is a larger share of emerging market consumer price index baskets relative to more developed markets. Reported inflation in India, Mexico, Philippines, Thailand, and Vietnam is particularly vulnerable to a sharp rise in food prices given the weight in CPI baskets (Chart 7). The use of price caps, export bans, and stockpiles often form part of the policy response to food price spikes. Such measures can reduce the impact on domestic food prices or smooth some of the price increase over a longer period, helping to reduce pressure on households.

India has already extended restrictions on wheat exports, as well as bans on rice and sugar exports to combat recent food inflation. The impact has already been seen in Thai rice prices, which have risen in response to tighter supply. In contrast, Brazil's strong crop harvest in the first half of 2023 has helped to cool domestic food prices and increase agricultural exports.

Chart 7. Some EMs more vulnerable to food inflation

Source: Haver, CEIC, abrdn, August 2023.

Food inflation could delay EM rate cuts

As such, the threat from El Niño will vary by market. Food prices are already elevated and disinflationary pressures following the surge in prices in 2022 will be strong (Chart 8).

Chart 8. Food disinflation could slow

Source: Haver, abrdn, August 2023.

EM central banks hiked aggressively in response to the surge in inflation during 2022 and only the most aggressive hikers (such as Brazil, Chile, and Hungary) have begun easing cycles as inflationary pressures have receded. As such, we do not expect further hikes in the event of food prices spikes. But central banks, particularly in emerging Asia and LATAM, could potentially delay easing cycles and cut less than markets have priced. For example, the Philippines and Mexico are two markets where rate cuts are expected before the end of the year but are both vulnerable to food inflation. The Philippines’ reliance on food imports and high CPI weighting for food could delay rate cuts. In Mexico, food inflation spills into core inflation measures and could have a large effect on overall inflation than suggested by the headline basket weighting for food.