Southeast Asia could be heading toward a fresh bout of food inflation as rising energy costs linked to the Middle East conflict, higher fertilizer prices, and the growing threat of a strong El Niño event combine to create what analysts see as a potentially significant supply shock for the region’s food system.

A new report by Goldman Sachs warns that the region faces mounting pressure from several interconnected risks that could drive food prices higher over the next 18 months, complicating efforts by governments and central banks to keep inflation under control while supporting economic growth.

The warning comes at a delicate moment for Southeast Asia. While many economies have managed to navigate years of global disruptions ranging from the pandemic to supply-chain bottlenecks and geopolitical tensions, food remains one of the most politically sensitive components of household spending across the region.

According to Goldman Sachs, the recent surge in oil prices triggered by the Middle East conflict has already begun filtering into consumer prices through fuel-related goods and services. More importantly, higher energy prices are expected to raise transportation costs and increase the price of fertilizer, creating a second-round impact on agricultural production.

“The oil shock from the Middle East conflict has shown up in fuel-sensitive CPI items, and higher fertilizer prices will raise farm input costs,” the bank said, adding that policymakers may increasingly face difficult choices between cushioning consumers from fuel costs or shielding them from rising food prices.

The challenge for governments is that food inflation often lingers longer than energy inflation. While oil prices can retreat if geopolitical tensions ease, higher farm input costs can affect planting decisions, crop yields, and harvest volumes months later, extending inflationary pressures throughout the food supply chain.

The risk is amplified by Southeast Asia’s heavy reliance on imported food and agricultural inputs. Singapore and the Philippines appear particularly exposed because both economies depend heavily on imported food supplies. Any sustained increase in global agricultural prices would likely pass quickly into domestic consumer prices.

The vulnerability extends beyond these two countries. Goldman noted that Malaysia and Indonesia, often viewed as relatively insulated because of their dominant palm oil industries, become net food importers once palm oil exports are excluded from the equation. That leaves both countries exposed to disruptions in global food markets despite their agricultural strengths.

Thailand faces a different challenge. More than 90% of its fertilizer needs are imported, making farmers highly sensitive to swings in international fertilizer prices. Any prolonged increase in costs could eventually reduce farm profitability and pressure food production.

The fertilizer issue has become increasingly important because the Middle East is a major supplier of fertilizer products and feedstocks. According to the OECD, disruptions to energy markets caused by the Iran conflict could raise fertilizer prices further and potentially affect availability.

Such disruptions may have consequences that extend well beyond current inflation concerns. Reduced fertilizer application can lower agricultural yields during future planting seasons, creating supply shortages that emerge months later. That means the impact of today’s geopolitical tensions could still be felt across food markets in 2027.

Adding to these concerns is the growing possibility of a strong El Niño weather pattern developing toward the end of 2026. Historically, El Niño events have been associated with drought conditions across large parts of Southeast Asia, reducing crop production and pushing food prices higher. The phenomenon has repeatedly disrupted rice production, vegetable harvests, and other agricultural activities across the region.

Goldman estimates that the combined effects of oil-price volatility, fertilizer inflation, and El Niño-related weather disruptions could add approximately one percentage point to regional food inflation after six months. The impact could rise to 2.1 percentage points after a year before moderating slightly to around two percentage points after 18 months.

Importantly, the bank emphasized that these figures represent additional inflationary pressure beyond normal food-price trends rather than total food inflation forecasts.

The implications stretch beyond households and food producers. Food inflation has historically been one of the most destabilizing economic forces in emerging markets because lower-income consumers spend a larger share of their earnings on food. Even modest increases in staple food prices can significantly affect household purchasing power and consumer confidence.

For central banks across Southeast Asia, the situation presents another policy challenge. Many monetary authorities have been attempting to support economic growth while ensuring inflation remains contained. A food-driven inflation shock could complicate interest-rate decisions, particularly if growth simultaneously slows.

The risks are further heightened by broader global uncertainties. While oil prices have retreated from their recent peaks following efforts to ease tensions in the Middle East, energy markets remain vulnerable to renewed disruptions. Any setback in diplomatic efforts involving Iran or fresh supply interruptions could quickly reverse recent declines in crude prices.

Climate-related risks are also becoming increasingly difficult for policymakers and investors to ignore. Scientists have repeatedly warned that warming temperatures are increasing the frequency and severity of weather events that affect agricultural production.

For Southeast Asia, where food security remains closely linked to economic stability and political confidence, the combination of geopolitical tensions, higher production costs, and climate risks creates a challenging backdrop. The concern among analysts is not that any single factor will trigger a crisis on its own. Rather, it is the convergence of multiple pressures at the same time that could generate a more sustained inflation shock than markets currently anticipate.

China’s central bank left its benchmark lending rates unchanged for the 13th consecutive month in June, signaling that authorities are in no hurry to deliver broad monetary stimulus despite persistent weakness in domestic demand and a deepening divergence in the world’s second-largest economy.

The People’s Bank of China (PBOC) kept the one-year loan prime rate (LPR) at 3.00% and the five-year LPR at 3.50%, in line with the unanimous expectations of 30 market participants surveyed by Reuters last week. The decision underscores a cautious policy stance that continues to favor incremental measures and fiscal support over aggressive rate cuts.

This steady approach comes as China grapples with a pronounced two-speed economy. Factory output and exports have shown surprising resilience, helped by global demand for Chinese goods and firms front-loading shipments amid trade tensions. However, domestic activity remains subdued, weighed down by a prolonged property sector downturn that continues to drag on household confidence and borrowing.

New bank lending in May rose less than expected, following a contraction the previous month, with household borrowing particularly weak amid the real estate slump. The data highlights the limited traction of monetary policy in reviving private sector demand, even as liquidity conditions remain relatively ample.

PBOC Governor Pan Gongsheng addressed these dynamics directly last week at the annual Lujiazui Forum in Shanghai. He noted that loan growth has slowed in recent years while bond and equity financing have gained ground — a development he described as evidence of “profound economic restructuring” and the emergence of new growth engines.

Rather than viewing the slowdown in credit as purely negative, Pan framed it as part of a necessary transition away from debt-fueled investment toward higher-quality, consumption- and innovation-driven expansion. This perspective helps explain why the central bank has held rates steady even as some analysts called for more support.

Analysts Expect Incremental Policy Response

Market observers largely see the decision as consistent with Beijing’s current playbook. Jing Sima, chief strategist at BCA Research, does not anticipate outright policy-rate cuts in the second half of the year.

“The persistent issue facing the aggregate economy is not a shortage of liquidity supply, but a lack of credit demand. Our base case is that fiscal policy becomes more supportive in the second half of the year, while the PBOC remains broadly accommodative but refrains from outright rate cuts,” Sima said.

Ho Woei Chen, economist at UOB, echoed this view, suggesting policy responses will stay measured unless growth threatens to undershoot the official target range of 4.5%-5.0%.

“Unless further evidence suggests that growth could slow below the official target of 4.5%-5.0%, we think policy responses will be incremental,” Chen said.

This approach reflects a deliberate strategy to avoid flooding the system with cheap credit that could exacerbate existing imbalances, particularly in the property sector, while directing support toward strategic areas such as advanced manufacturing, technology, and green industries.

By keeping rates on hold, the PBOC is effectively placing greater emphasis on fiscal tools and structural reforms to address the economy’s challenges. Beijing has already signaled more proactive fiscal measures in the second half of the year, including potential infrastructure spending and support for consumption.

The steady LPR also preserves policy space for future adjustments if downside risks intensify. However, it leaves the central bank navigating a narrow path: supporting growth without reigniting leverage concerns or property speculation, while managing external pressures from global trade fragmentation and shifting supply chains.

For businesses and households, the unchanged rates mean borrowing costs remain stable in the near term, providing some predictability. Yet some business leaders are concerned that the lack of broader easing may prolong the pressure on domestic demand, particularly in real estate and related sectors that have been key drivers of past growth.

China’s policymakers appear to be betting that a combination of targeted fiscal support, ongoing economic restructuring, and resilient external demand will be enough to keep growth within target without resorting to the kind of aggressive monetary stimulus seen in previous cycles.