San Francisco, Nov 2 (Reuters) – The climate phenomenon El Niño, which could cause a record rise in ocean temperatures in the coming months, represents a “significant risk” of higher inflation in the United States in 2027, although it is also expected to contribute to job creation, according to a study published this Monday by the San Francisco Fed.
The current El Niño may be among the most intense on record, according to projections by the World Meteorological Organization released last month, causing droughts in some places, floods in others and higher heat in many parts of the world.
“We estimate that the current episode may have already raised overall price levels by about 0.3 percentage point between April and July this year,” wrote three researchers from the Fed’s regional bank in the latest edition of their “Economic Letter”.
“The estimates indicate that this initial increase should fade by the end of this year, but then could push prices higher in 2027 by as much as 1 percentage point.”
The Fed has been facing inflation above its 2% target for more than five and a half years due to a series of shocks, including supply-chain disruptions during the pandemic, a sharp rise in tariffs in 2025 and higher global oil prices since the start of the war in Iran earlier this year.
The projection that another possible shock could exert upside pressure on prices comes at a time when the Fed is also dealing with the inflationary impact of demand for goods and services related to AI, in addition to financial conditions that, according to analysts, are not particularly restrictive.
The Fed kept interest rates unchanged last week, but it is widely expected to raise the federal funds rate in December and again next year to curb inflation.
The implications of El Niño for the U.S. economy are uncertain, wrote the San Francisco Fed associate researchers Molly Arden and Toby Graf, together with senior economist Brigitte Roth Tran.
Although improvements in the quality of weather forecasts allow businesses, households and policymakers to be better prepared than in the past, the article’s authors wrote, the global integration of markets means that the U.S. economy may be more sensitive than before to external shocks.
“More recent developments, such as disruptions in the fertilizer market, supply-chain disruptions in energy markets, and record-breaking weather events, could also interact with this El Niño in unexpected ways,” they wrote.
(Reporting by Ann Saphir)
