Is natural disaster a driver of inflation? San Francisco Federal Reserve warns: El Niño may increase PCE by another 1 percentage point in 2027

The Zhitong Finance App learned that the San Francisco Federal Reserve warned that the continued El Niño weather phenomenon may increase inflationary pressure in the US in 2027 and may push the personal consumption expenditure (PCE) price index to rise by up to 1 percentage point throughout the year.

In an Economic Letter (Economic Letter) released on November 2, the regional Federal Reserve Bank said that the current El Niño incident may have contributed about 0.3 percentage points to the US price level between April and July 2026.

Although this initial increase is expected to fall before the end of the year, the weather phenomenon could re-create inflation risks in 2027, especially if the La Niña pattern occurs later.

According to the Federal Reserve Bank of San Francisco's analysis of El Niño events since the 1950s, weather-related disturbances usually caused prices to rise temporarily during the first summer of the event, and then fall back before January of the following year.

However, historical experience also shows that the El Niño event is often associated with higher inflation the following year. Expected price pressure mainly comes from core services and food categories; if La Niña conditions occur, the current El Niño incident may drive PCE prices to rise 1 percent net in 2027.

If there is no La Niña incident next year, the bank's model does not anticipate further net price effects in 2027.

The analysis also points to possible improvements in the US labor market. Historical data shows that the El Niño incident often supports employment growth the year after it occurred.

Although employment in the first year of an El Niño event was generally largely unaffected, the total number of non-farm payrolls often increased the following year. The bank said that current weather patterns may have similar effects. Whether followed by La Niña or not, it is likely to support higher employment levels and improve unemployment in 2027.

However, the San Francisco Federal Reserve Bank cautions that there is considerable uncertainty about these estimates. The analysis covered 22 El Niño events since the 1950s, of which only 4 were classified as “very strong,” and the current event is expected to be stronger than any historical event in the sample.

The bank also emphasized the uncertainty of weather forecasts, the probability that La Niña may occur in 2027, and the possibility that disruptions in modern supply chains and the global integrated market may amplify the economic impact.