Asia heatwaves spell double trouble for economies hit by oil

Asia is grappling with a new threat to inflation on top of an oil shock, as a looming El Nino brings soaring temperatures and dry weather to countries from India to New Zealand, driving up food costs.

Inflation has accelerated to multi-year highs across much of Asia, latest figures showed, led by higher transport, logistics and utility costs. The biggest spikes were in the Philippines and Pakistan, where inflation soared above 7 per cent and 11 per cent, respectively.

Those pressures could intensify further, as El Niño is forecast to bring drier conditions and hotter weather later in 2026. Food makes up about 40 per cent to 50 per cent of consumer price baskets in emerging markets in Asia, making them vulnerable to price shocks and erosion of real incomes.

“Food inflation in Asia is set to rise in 2026,” said Mr Adam Ahmad Samdin of Oxford Economics.

“The combination of geopolitical risks, fertiliser market disruptions and climate uncertainty suggests that overall food inflation risks are likely to remain elevated over the coming quarters.”

Those threats could be compounded, Mr Samdin added, if governments impose export restrictions to protect domestic food supplies, similar to 2022 and 2023 in the wake of Russia’s full-scale invasion of Ukraine and extreme weather in some countries.

Upward pressure on food prices will likely be more visible only from the second half of the year as a recent surge in fertiliser costs driven by the Middle East conflict will take time to feed through to food prices, economists warned.

“All else equal, if weather conditions deteriorate as projected, the second half of 2026 may see bigger inflationary pressures,” Bank of America economists led by Mr Rahul Bajoria wrote in a note focused on South-east Asia.

Concerns have already shown up in regional bond markets, with an index of 10-year yields from eight emerging Asian economies rising by more than 80 basis points since the start of the Iran war.

The International Monetary Fund expects inflation to be as much as four percentage points higher by 2027, while the Asian Development Bank raised its regional consumer price index forecast for 2026 to 5.2 per cent from 3.6 per cent.

The Philippines is among the most vulnerable, as it is heavily reliant on food and fuel imports.

Inflation in April was far worse than economists had projected and well above the central bank’s 3 per cent target, even before the onset of El Nino. Weak consumer spending dragged down economic growth to its slowest pace in more than a decade, outside of the pandemic, data showed on May 7.

Bangko Sentral ng Pilipinas – the Philippines’ central bank – said this week that it is ready to act, while economists say this may require off-cycle and outsize interest-rate hikes just to catch up with inflation, even if it comes at the cost of stalling the economy.

In Indonesia, which saw economic growth accelerate to a three-year high in the first quarter, activity may slow ahead with potential downside risks coming from a stronger El Nino dry spell.

At the same time, weaker hydropower generation in India, Vietnam and parts of China as a result of El Nino may force greater reliance on coal and natural gas, pushing up electricity tariffs.

Within emerging Asia, the Reserve Bank of India (RBI) has warned that a weaker monsoon – the seasonal rains critical for the country’s farm output – could hit crop yields and push up food prices.

Economists predict inflation will climb above 5 per cent in the fiscal year starting April 1, exceeding the RBI’s 4.6 per cent projection. Hot weather could also force farmers to use more diesel-powered irrigation, and households to crank up air-conditioning – further driving up costs.

Citigroup has cut its growth forecast for India to 6.6 per cent from 7.1 per cent for 2027 and expects the RBI to remain on hold. Still, a “double whammy” for inflation could be in the offing if El Nino disrupts the monsoon in 2026, according to DBS Bank economist Radhika Rao.

Pakistan is vulnerable too, where the central bank unexpectedly hiked rates in April to tame inflation that has jumped to double digits and is expected to stay elevated.  

By contrast, the impact on Asia’s richer countries is likely to be relatively modest, as more diversified, services-heavy consumer price index baskets dilute food and energy shocks, with insurance costs providing only a smaller, secondary channel.

Still, the effects will be harder to ignore. For now, Singapore, which boasts of a strong AI-driven economic growth, is expected to see stable inflation.

In Japan, a recent surge in food prices is making inflation “more sticky”, according to Bloomberg Economics, with rice – a staple food – still up 6.8 per cent in March, despite easing from the previous month. The stronger price impulse could prompt the Bank of Japan to raise rates in June, it added, even before El Nino risks develop.

And, in neighbouring South Korea, which has kept its benchmark rate at 2.5 per cent since July 2025, the central bank is probably “behind the curve” on monetary policy as inflation risks build in the country, according to Mr Brian Quartarolo, chief investment officer at Anahata Capital Management. BLOOMBERG