El Nino could add to US inflation pressures in 2027, San Francisco Fed paper warns

The El Nino weather pattern could emerge as another source of inflationary pressure for the US economy in 2027, with its effects potentially extending beyond food prices to broader supply chains. The weather phenomenon poses a "meaningful risk" of higher inflation, even as it could also support employment, according to a San Francisco Federal Reserve research paper published on Monday, Reuters reported.

The current El Nino episode could rank among the strongest on record, raising the likelihood of extreme weather conditions, including droughts, floods and higher temperatures across several parts of the world.

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The research estimates that the weather pattern may have already lifted US headline price levels by around 0.3 percentage point between April and July this year. While this initial impact is expected to fade by the end of 2026, inflation could face renewed pressure next year, Reuters reported.

El Nino could push prices higher in 2027

"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 researchers added that the initial increase could fade by year end before El Nino potentially pushes prices higher by as much as 1 percentage point in 2027s.

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The findings come as the Federal Reserve continues to grapple with inflation running above its 2% target for more than five and a half years. Previous sources of price pressure have included pandemic era supply chain disruptions, higher tariffs in 2025 and rising global oil prices since the war in Iran began earlier this year.

Supply chain disruptions add to uncertainty

The paper was authored by San Francisco Fed research associates Molly Arden and Toby Graf, along with senior economist Brigitte Roth Tran, Reuters reported.

The researchers said the economic implications of El Nino remain uncertain. While improvements in weather forecasting have helped businesses, households and policymakers prepare for extreme conditions, deeper global market integration could leave the US more exposed to disruptions originating overseas.

"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," the researchers wrote.

The potential inflationary impact adds another complication for the Fed, which is also assessing price pressures from AI related demand and financial conditions that analysts consider relatively accommodative. The central bank held interest rates steady last week but is widely expected to raise them in December and again next year to contain inflation.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)