El Nino heatwaves could add a full percentage point to European inflation next year, Jefferies warns

Jefferies has warned that the El Nino weather pattern gripping Europe could add as much as one percentage point to inflation next year, dealing a fresh blow to central banks still battling to bring price growth back to target.

The investment bank's analysis estimates that food prices across the UK and Europe will climb between five and nine per cent as heatwaves and drought hammer harvests. Because food and related items make up roughly 13 per cent of the European consumer basket, the weather shock alone could lift headline inflation by 0.5 to one percentage point in 2025.

Extreme weather compounds existing price pressures

El Nino, a natural cycle in which Pacific sea-surface temperatures rise unusually high, typically brings hotter, drier conditions across the northern hemisphere. This year's "Super" iteration has been the primary driver of Europe's unprecedented summer heat, which farmers and retailers say has produced the worst crop yields in living memory.

Mohit Kumar, chief European economist at Jefferies, noted that the weather impact sits on top of "already upward pressure on commodity prices due to the US Iran war", making the combined effect likely larger than the headline figures suggest.

Bank of England on alert

The Bank of England's rate-setting Monetary Policy Committee has already flagged the phenomenon. Deputy governor Dave Ramsden said El Nino "may add to inflationary pressures", while external member Megan Greene described it as a looming "supply risk". Both indicated they will monitor developments ahead of future rate decisions.

Food and related products account for around 13 per cent of the consumer basket in Europe. The severe weather impact could raise inflation by between 0.5 per cent and one per cent next year.

Until recently, economists expected annual price growth to return to the two per cent target later this year, paving the way for rates to fall toward three per cent by 2026. The protracted conflict involving the US and Iran upended that timeline, and the El Nino effect adds a further layer of uncertainty.

Food manufacturers brace for commodity shortfalls

Liliana Danila, chief economist at the Food and Drink Federation, said the full impact remains unclear but manufacturers are preparing for reduced output of key commodities including cocoa, coffee, sugar and rice. UK producers, she added, were already grappling with cost increases stemming from the Iran conflict, making the weather shock "an additional concern".

The heatwave's reach extends beyond Britain. Germany is bracing for another round of extreme temperatures, underscoring the continental scale of the supply disruption.

With inflation still above target and new supply risks emerging, the path back to stable prices looks longer than policymakers had hoped. Markets will now watch upcoming crop reports and central bank minutes closely for clues on whether rate cuts can proceed as planned or must be delayed further.