San Francisco Federal Reserve: The El Niño phenomenon may drive up US inflation in 2027 while boosting employment

The Zhitong Finance App learned that according to a recent economic research report released by the Federal Reserve Bank of San Francisco, the sharp rise in Pacific seawater this year — a cyclical climate phenomenon known as El Niño — may push up US prices and boost employment next year.

According to reports, when the El Niño phenomenon occurred, abnormally warm seawater appeared in the equatorial Pacific Ocean, which in turn changed atmospheric circulation and weather patterns. In the US, this phenomenon usually results in milder winter climates in parts of the north, more rainfall in the southern regions, and a reduction in Atlantic hurricane activity. According to data from the US National Oceanic and Atmospheric Administration (NOAA), the current El Niño phenomenon is classified as “very intense”.

The San Francisco Federal Reserve's analysis found that this weather pattern may cause price pressure to reheat — judging from historical conditions, the El Niño phenomenon often pushes up core service prices and food prices.

The risk that the El Niño phenomenon poses to US inflation will largely depend on whether it will turn into a La Niña phenomenon next year. The impact of La Niña is the opposite of El Niño. It is characterized by stronger Pacific wind winds and a drop in water temperature along the Pacific coast.

According to study authors Molly Ardren, Tobin Graf, and Brigitte Roth Tran, the current El Niño phenomenon may have had an impact — personal consumption expenditure (PCE) prices between April and July this year were therefore about 0.3 percentage points higher than in the absence of this phenomenon.

Researchers expect that this initial price increase will gradually subside before the end of this year. However, if the current El Niño phenomenon is followed by a La Niña phenomenon next year, then further price pressure may increase the PCE inflation rate by an additional 1 percentage point in 2027.

Meanwhile, the San Francisco Federal Reserve's analysis found that in the first year of the El Niño phenomenon, the total number of non-farm payrolls in the US was generally not significantly affected, but by the second year, the number of employed people often increased significantly. Unlike inflation predictions that are highly dependent on whether La Niña will occur after El Niño, researchers expect recruitment activities to increase and unemployment to decline in 2027. This judgment is based on the pattern that has continued to occur in the past multiple El Niño cycles.

Weather conditions can affect various sectors of the economy in different ways. For example, milder winters may reduce heating needs and increase productivity in construction and agriculture; while increased precipitation may disrupt construction activities or cause flooding.

The authors point out that in the early days of the El Niño cycle, price pressure will affect consumers' wallets earlier, but its impact on the labor market will take longer to become apparent.

The data sample used by the authors included only 22 El Niño events since the 1950s, of which only 4 were “very intense,” and it is expected that the intensity of the current El Niño phenomenon will exceed any of the events included in the analysis in the historical data.

The authors wrote, “We believe that these findings are not a prediction, but rather indicate that inflation faces significant upward risks next year.” At the same time, they pointed out that the El Niño phenomenon increased uncertainty about the overall economic outlook for the US.