El Nino poses ’meaningful risk’ of higher inflation in 2027, SF Fed paper says

The San Francisco Federal Reserve warns that the ongoing El Nino weather pattern poses a significant risk of higher inflation in the United States by 2027, despite its potential to boost employment. The current El Nino may be among the strongest on record, leading to droughts, floods, and increased heat worldwide. The researchers estimate that the present El Nino episode has already contributed to a 0.3 percentage point rise in headline prices between April and July 2024, with the effect potentially fading by year-end but persisting in 2027, possibly increasing prices by up to 1 percentage point.

This projection comes amid the Federal Reserve's ongoing struggle with inflation exceeding its 2% target for over 5.5 years, attributed to various shocks such as pandemic supply chain disruptions, increased tariffs in 2025, and soaring global oil prices since Iran's war began. The Fed is also addressing the impact of demand for AI-related goods and services, as well as financial conditions deemed not particularly restrictive.

As the Fed holds interest rates steady this week but anticipates rate hikes in December and next year to curb inflation, the implications of El Nino for the US economy are uncertain. While better weather forecasting enables better preparation, global market integration could make the US economy more susceptible than before to foreign shocks.

Recent issues like fertilizer market disruptions, energy market supply chain disruptions, and record-breaking weather events may interact with El Nino in unforeseen ways.