Can natural disasters become a driver of inflation? San Francisco Fed warns: El Nio may push PCE up by another 1 percentage point in 2027.

The San Francisco Fed warns that a persistent El Nio weather phenomenon could intensify U.S. inflationary pressure in 2027, potentially driving the personal consumption expenditures (PCE) price index up by as much as 1 percentage point over the year. In an Economic Letter published on November 2, the regional reserve bank said the current El Nio event may have already contributed about 0.3 percentage points to U.S. price levels between April and July 2026. Although this initial increase is expected to fade by year-end, the weather phenomenon could re-create inflation risk in 2027, especially if a La Nia pattern follows. According to the Federal Reserve Bank of San Francisco's analysis of El Nio events since the 1950s, weather-related disruptions typically push prices temporarily higher in the first summer of the event, then fade by January of the following year. However, historical experience also shows that El Nio events are often associated with higher inflation the following year. The expected price pressure comes mainly from core services and food categories; if La Nia conditions emerge, the current El Nio event could drive a net 1 percentage point increase in PCE prices in 2027. If no La Nia event occurs next year, the bank's model expects no further net price effect in 2027. The analysis also points to a possible improvement in the U.S. labor market. Historical data show that El Nio events tend to support employment growth in the year after they occur. Although employment is usually largely unaffected in the first year of an El Nio event, total nonfarm payrolls often grow the following year. The bank said the current weather pattern could have a similar effect, potentially supporting higher employment levels and improving unemployment conditions in 2027, whether or not it is followed by La Nia. However, the Federal Reserve Bank of San Francisco cautioned that these estimates carry considerable uncertainty. Its analysis covered 22 El Nio events since the 1950s, of which only 4 were classified as "very strong," while the current event is expected to be stronger than any historical event in the sample. The bank also highlighted the uncertainty of weather forecasts, the probability that La Nia may emerge in 2027, and the possibility that modern supply-chain disruptions and globally integrated markets could amplify the economic impact.