El Niño Poses ‘Meaningful Risk’ for Inflation to Rise in 2027, SF Fed Reports
A weather phenomenon is brewing in the Pacific Ocean that could add as much as a full percentage point to U.S. prices in 2027, according to the Federal Reserve Bank of San Francisco.
The phenomenon, known as El Niño, is strengthening rapidly and could become one of the strongest events in modern records. NOAA and the World Meteorological Organization said it is likely to intensify through late 2026, peak around December, and persist into spring 2027.
El Niño is a natural climate phenomenon in which the surface waters of the tropical Pacific Ocean become unusually warm, changing weather patterns around the world.
The October NOAA assessment showed an 83% probability of a historically strong event during October–December. The World Meteorological Organization also warned that the event could produce record ocean temperatures and substantial disruptions to global rainfall.
Potentially a Historic El Niño
The bottom line is that this is potentially a historic El Niño, with significant consequences for winter weather, agriculture, flooding, drought, and global temperatures.
The San Francisco Fed’s findings come from a working paper described as posing a “meaningful risk” of higher U.S. inflation in 2027, even as it will likely add to employment.
According to Reuters, researchers estimate the current El Niño may have already increased headline price levels by about 0.3 percentage points between April and July of this year. That initial bump is projected to fade by the end of the year before potentially pushing prices up in 2027 by as much as 1 percentage point.
The underlying research, titled “In Hot Water? The Macroeconomic Impacts of El Niño,” notes that El Niños pose material upside risk for PCE prices and employment.
Why Would Prices Climb?
The San Francisco Fed research noted that the longer-run price effects are driven by core services and food prices rather than any single commodity spike. It noted that those longer-run effects depend on whether La Niñas follow El Niños, leaving the ultimate size of the impact uncertain.
On the labor side, the Fed’s research found that employment increases are widespread in terms of both sectors and states in the year following an El Niño, after some modest initial offsetting effects.
The paper also noted a wrinkle in how shocks might ripple through the economy today.
It said that global integration of markets means the U.S. economy may be more sensitive than before to foreign shocks, Reuters reported. The report’s authors added that disruptions to the fertilizer market, supply chain disruptions in energy markets, and record-setting weather events could also interact with this El Niño in unexpected ways.
The World Meteorological Organization said El Niño likely will strengthen further during the coming months to a very strong intensity, with impacts continuing into 2027. The WMO said the odds of the pattern persisting through February 2027 are nearly 100%.
According to the WMO, sea-surface temperatures in the central-eastern equatorial Pacific were running roughly +2.2°C to +2.6°C above average between late July and mid-August.
How Have Past El Niños Affected Prices?
Reuters noted this is not the first time economists have tried to quantify El Niño’s bite on inflation.
A 2015 working paper from the International Monetary Fund found that most countries in its sample experienced short-run inflationary pressures following an El Niño shock, largely tied to rising energy and non-fuel commodity prices.
Reuters noted the IMF study examined inflation across 21 countries using data running from 1979 through 2013.
That IMF analysis revealed real non-fuel commodity prices climbed 5.31% four quarters after an El Niño shock, amid broader energy-price pressures.
