San Francisco Fed paper flags El Nino inflation risk for U.S. economy in 2027

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El Nino inflation risk 2027

Highlights

San Francisco Fed research estimates the current El Nino has raised U.S. headline prices by 0.3 percentage point between April and July 2024, with further impact up to 1 percentage point possible in 2027.
El Nino may also boost U.S. employment, but researchers warn that fertilizer, energy supply, and weather disruptions could amplify inflation risks in unpredictable ways.
The Fed faces continuing inflation above its 2% target, with markets expecting interest rate hikes in December and 2025 amid supply shocks and AI-driven demand pressures.

Research findings and inflation timeline

As reported by Reuters, citing the San Francisco Federal Reserve's latest Economic Letter, the current El Nino may have already increased headline price levels by about 0.3 percentage point between April and July of this year. The paper, written by research associates Molly Arden and Toby Graf with senior economist Brigitte Roth Tran, says that rise is estimated to fade by the end of this year before potentially pushing prices up in 2027 by as much as 1 percentage point.

The researchers say El Nino's implications for the U.S. economy remain uncertain, even as the weather pattern is expected to rank among the strongest on record. The World Meteorological Organization projected last month that the current episode could bring drought to some regions, flooding to others and increased heat across many parts of the world.

The paper also says El Nino is likely to add to employment, suggesting the economic effects may not be limited to consumer prices. Still, the authors warn that recent disruptions in fertilizer markets, energy supply chains and record-setting weather events could interact with the current episode in unexpected ways.

Policy implications for the Federal Reserve

The findings come as the Federal Reserve continues to confront inflation that has stayed above its 2% target for more than five-and-a-half years. Price pressures have been driven by a series of shocks, including pandemic-era supply chain disruptions, a sharp increase in tariffs in 2025 and higher global oil prices since the war in Iran began early this year.

The prospect of another supply-side shock arrives as policymakers are also dealing with inflation linked to demand for AI-related goods and services, as well as financial conditions that analysts say are not especially restrictive. The Fed held interest rates steady last week, but markets widely expect it to raise the policy rate in December and again next year to curb inflation.

The authors say better weather forecasting allows businesses, households and policymakers to prepare more effectively than in the past. But they add that deeper global market integration may leave the U.S. economy more exposed than before to foreign shocks tied to extreme weather.

In our earlier report on the conflict-driven surge in oil shipping costs, we explained how attacks and rerouted tanker traffic were pushing freight and insurance premiums sharply higher on key routes such as Hormuz and the Red Sea. We noted that these transport costs were becoming a much larger component of crude and fuel prices, with knock-on effects for consumer inflation and import-dependent markets.

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