Prices continued to climb at a brutally rapid pace in September, with a key inflation index increasing at the fastest rate in 40 years, bad news for the Federal Reserve as it struggles to wrestle the cost of living back under control.
Overall inflation climbed 8.2 percent over the year through September, according to the latest Consumer Price Index report on Thursday, a slight moderation from August but more than what economists had expected.
Even more worrisome, underlying inflation trends are headed in the wrong direction. After stripping out fuel and food — which are volatile and removed to get a better sense of the trajectory — prices climbed 6.6 percent over the year through September. That was the quickest rate since 1982.
Inflation has been rapid for a year and a half now, and it is proving stubborn even as the Fed mounts its most aggressive campaign in generations to slow the economy and bring price increases under control. Fast inflation has also triggered the highest Social Security cost-of-living adjustment in decades — an 8.7 percent increase in benefits to retired and disabled Americans, a move that was announced Thursday.
Central bankers have quickly raised interest rates from near zero to a range of 3 to 3.25 percent, and investors expect a fourth straight three-quarter-point rate increase at the Fed’s next meeting, which concludes on Nov. 2. After the release of Thursday’s inflation data, they began to bet on another large move at the central bank’s December meeting.
“The trend is very troubling,” said Blerina Uruci, a U.S. economist at T. Rowe Price.
Markets swung wildly after the report, with stocks falling sharply initially but then surging higher as investors struggled to digest what the data meant for the future. The S&P 500 index closed up 2.6 percent.
Higher Fed rates are already slowing the housing market, and are expected to slowly filter through the rest of the economy as they make it more expensive to borrow money for big purchases or business expansions. But consumer demand is taking time to crack: With jobs plentiful and wages rising, Americans are still spending.
Prices continued to climb at a brutally rapid pace in September, with a key inflation index increasing at the fastest rate in 40 years, bad news for the Federal Reserve as it struggles to wrestle the cost of living back under control.
Overall inflation climbed 8.2 percent over the year through September, according to the latest Consumer Price Index report on Thursday, a slight moderation from August but more than what economists had expected. Inflation has been rapid for a year and a half now, and it is proving stubborn even as the Fed mounts its most aggressive campaign in generations to slow the economy and bring price increases under control. Fast inflation has also triggered the highest Social Security cost-of-living adjustment in decades — an 8.7 percent increase in benefits to retired and disabled Americans, a move that was announced Thursday.
Central bankers have quickly raised interest rates from near zero to a range of 3 to 3.25 percent, and investors expect a fourth straight three-quarter-point rate increase at the Fed’s next meeting, which concludes on Nov. 2. After the release of Thursday’s inflation data, they began to bet on another large move at the central bank’s December meeting.
“The trend is very troubling,” said Blerina Uruci, a U.S. economist at T. Rowe Price.
Markets swung wildly after the report, with stocks falling sharply initially but then surging higher as investors struggled to digest what the data meant for the future. The S&P 500 index closed up 2.6 percent.
Higher Fed rates are already slowing the housing market, and are expected to slowly filter through the rest of the economy as they make it more expensive to borrow money for big purchases or business expansions. But consumer demand is taking time to crack: With jobs plentiful and wages rising, Americans are still spending.
And the duration of the price burst is troubling. Overall inflation has been above 5 percent for a full year now, far above the central bank’s goal. The Fed aims for 2 percent annual inflation on average, which it defines using a different but related gauge: the Personal Consumption Expenditures measure, which will not be released until late October.
Consumer inflation expectations have yet to budge much in surveys. But economists said there were signs in the inflation data itself that price increases might be growing more entrenched. Housing costs, which make up a big part of inflation, have been rising steadily. Service industries like pet and dental care are posting big price increases, which could be a sign that the tight job market is pushing up wages and feeding into higher prices as companies try to cover their labor costs.
“We are starting to see persistent inflation creeping into the economy,” said Steve Rick, chief economist at CUNA Mutual Group. “We are really concerned about this turning into a wage price spiral, with wages rising and making it hard to get inflation down anytime soon.”
While wages are not climbing quickly enough to keep up with inflation, they are rising much more rapidly than is typical. Average hourly earnings for rank-and-file workers climbed 5.8 percent over the year through September. Those pay gains hovered around 2 percent or 3 percent in the decade leading up to the pandemic.
It is not just service costs increasing. Grocery bills were up across the board in September, with increases in the cost of fruit, vegetables and bakery products. The price of apples rose 5 percent from the previous month, while lettuce gained 6.8 percent and flour 2 percent.
Forces that economists had expected to temper inflation — including recent healing in tangled supply chains are taking time to show up in the data. Used car prices were expected to decline sharply in this report, for instance, but fell only about half as much as anticipated. New car prices and car parts continued to rise rapidly as disruptions in those industries linger.
As a result, goods prices, which were expected to drag down inflation, instead neither added to nor subtracted from the data in September. Gas prices did weigh on overall inflation, which bodes badly going forward, since fuel costs have bounced back over the past month. Gas could switch from pulling inflation down to pushing it up by the next data release.