No escape from inflation: ‘Godzilla’ El Niño, AI boom, tariffs, and fuel crunch to keep prices high

That will keep Wall Street on high alert for rate hikes from the Federal Reserve, with policymakers growing impatient after five years of inflation exceeding their 2% target.

By the end of the year, investors see 85% odds that the central bank will raise rates at least once, with a nearly 50% chance that two hikes or more are likely.

Here’s a look at several factors in the inflation outlook.

‘Godzilla’

A major disruption in commodity prices could come from the so-called El Niño weather pattern taking shape this summer. It’s expected to be so strong that some scientists have dubbed it a “super” or “Godzilla” El Niño.

It has historically been associated with heavier rainfall in southern South America, the southern U.S., Central Asia and East Africa, but drier conditions in Australia, northern South America, West Africa, the northern U.S. and Canada, as well as parts of South, South East and East Asia.

Because El Niño has uneven effects, some areas will experience better growing conditions while others will see worse ones. But a note from Capital Economics warned the agricultural products that tend to be most affected are soft commodities.

That includes perishable crops that are grown and cultivated. In fact, during the previous El Niño in 2023 and 2024, the largest increases in agricultural prices were of coffee and cocoa, according to Capital Economics.

AI boom

Hyperscalers are pouring hundreds of billions of dollars every year to build up AI capacity as quickly as possible, creating imbalances that are stoking inflation.

For instance, demand for memory chips to power data centers is so high that supply is insufficient for other uses like consumer electronics.

Apple recently announced steep price hikes for its devices and is even reportedly trying to buy chips from a blacklisted Chinese producer to ease the supply crunch.

Minutes from the Fed’s last meeting also revealed that AI-driven inflation was concerning central bankers. And New York Fed President John Williams publicly addressed the worries in a speech this past week.

He warned that if it “creates a sustained impulse to demand relative to supply in inflation, I do think that’s the kind of situation where you don’t look through this,” meaning the Fed would be forced to hike rates.

Trump tariffs

President Donald Trump’s tariffs appeared to boost prices less than feared last year, as companies ate some of the added costs.

But the bill is coming due for the rest of the tab as businesses are not finished raising prices. According to a New York Fed survey, 47% of service firms and 44% of manufacturers that paid tariffs directly said they have more tariff-induced price increases to pass on to consumers.

Despite the Supreme Court striking down Trump’s global levies, others were unaffected, like those on steel, while the administration plans to impose new tariffs under section 301 of the Trade Act of 1974.

“These results suggest that many businesses are still adjusting their prices, more than a year after tariffs were first introduced,” New York Fed researchers wrote. “It is not clear whether firms are responding to a single round of tariffs or to the sequence of increases that has unfolded over the past year or more. What is clear is that the adjustment has been gradual, in line with a growing body of research showing that tariffs pass through to consumer prices incrementally, building over the better part of a year rather than all at once.”

War-related price spikes

The U.S.-Israeli war on Iran not only disrupted oil supplies, but it also created a supply shock for fuels like gasoline and diesel.

While crude prices have tumbled from wartime highs, prices for refined products have been slower to come down as U.S. demand has remained high while China has only recently lifted curbs on fuel exports.

At the same time, Ukraine’s drone attacks across Russia’s oil infrastructure have devastated its refining capacity, forcing the Kremlin to slash fuel exports so that domestic demand can be met. Diesel futures spiked 11% on Wednesday after Russia said it would ban exports of the crucial fuel.

Russian motorists have been waiting in long lines at gas stations, sometimes for 18 hours, to fill up. Moscow has even been forced to import fuel from India, despite Russia being a top oil producer.

Meanwhile, Ukrainian attacks on Russian shipping have also affected grain exports and a key shipping channel in the Black Sea. In retaliation, Russia has hit key hubs for Ukraine’s grain shipments.

Prices for wheat jumped as much as 4.8% on Friday, the most since mid-May, and a benchmark for European prices climbed as much as 5.7%, the most since mid-April.