The El Nino weather pattern that could cause a record rise in ocean temperatures in coming months poses a “meaningful risk” of higher US inflation in 2027 even as it also will likely add to employment, according to research published Monday by the San Francisco Federal Reserve.
The current El Nino may be among the strongest on record, the World Meteorological Organization projected last month, causing drought in some places, flooding in others and increased heat in many parts of the world.
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“We estimate that the current episode may have already increased headline price levels about 0.3 percentage point between April and July of this year,” three of the regional Fed bank’s researchers wrote in the latest edition of its Economic Letter.
“The estimates point to that initial rise fading by the end of this year but then potentially pushing prices up in 2027 by as much as 1 percentage point.”
The Fed is grappling with inflation that’s been above its 2% target for more than 5-1/2 years due to a series of shocks, including pandemic-era supply chain disruptions, a sharp increase in tariffs in 2025 and a rise in global oil prices since the war in Iran began early this year.
The projection that yet another potential shock could put upward pressure on prices comes as the Fed is also addressing the inflationary impact of demand for AI-related goods and services, and financial conditions that analysts say are not particularly restrictive.
The Fed held interest rates steady last week but is widely expected to raise the policy rate in December, and again next year, to tamp down inflation.
El Nino’s implications for the US economy are uncertain, wrote San Francisco Fed research associates Molly Arden and Toby Graf, with senior economist Brigitte Roth Tran.
Though improved weather forecast quality allows businesses, households and policymakers to be better prepared than in the past, the paper’s authors wrote, global integration of markets means the US economy may be more sensitive than before to foreign shocks.
“More recent developments like the disruptions to the fertilizer market, supply chain disruptions in energy markets, and record-setting weather events could also interact with this El Nino in unexpected ways,” they wrote.
