Pacific waters are running hot this year, and that is beginning to show up in how the Federal Reserve thinks about prices. Economists at the Federal Reserve Bank of San Francisco used decades of weather and economic records to gauge how the current El Niño could affect the US economy. The episode may already have nudged personal consumption expenditures prices up slightly between spring and midsummer, a bump expected to fade by year end, with a larger net rise in 2027, led by core services and food, if La Niña follows, the bank's economic letter said.
El Niño sets in when Pacific trade winds weaken, warming the eastern ocean and shifting the jet stream south. For the United States, that typically means a quieter Atlantic hurricane season, wetter winters across the South and milder ones in the North. Strong episodes usually peak around the turn of the year and often give way to La Niña, the cycle's cool phase. This one is unusually powerful. On October 8, NOAA's Climate Prediction Center said the event was still strengthening, was likely to stay strong to very strong into early 2027 and could become the most intense since records began in 1950.
Past El Niños have left total employment roughly unchanged in their first year and then lifted it in the year after, a pattern the researchers link partly to warmer northern winters. Unlike the price effect, the employment gain has tended to appear whether or not La Niña arrives. For a central bank charged with both stable prices and maximum employment, that combination pulls in opposite directions.
The researchers are candid about the limits of the exercise. The record holds only four very strong El Niños, and the current one is projected to exceed them all, so the estimates assume effects scale in step with ocean warming. Too much of a good thing, such as rain in the South, can turn into flooding the model does not capture. The authors therefore frame their results as pointing to a meaningful inflation risk for 2027.