U.S. inflation continued to rise at a brisk pace in September, underscoring the Federal Reserve’s intent to maintain high interest rates to bring prices under control.
The consumer price index (CPI), a key measure of inflation, climbed 0.4% last month, the Bureau of Labor Statistics reported Thursday. The increase matched economists’ forecasts and followed a 0.1% gain in August.
On an annual basis, the CPI increased 8.2% in September, down slightly from 8.3% in August but still near 40-year highs.
Core Prices Also Rise
The core CPI, which excludes volatile food and energy costs, rose 0.6% in September, accelerating from a 0.1% increase the previous month. For the past 12 months, core prices were up 6.6%, higher than the 6.3% year-over-year increase recorded in August.
The core index gives Fed officials a better read on underlying inflation trends in the economy. The latest data shows price pressures remain stubbornly high despite the central bank’s efforts this year to cool demand by aggressively raising interest rates.
“Inflation continues to run very hot even when you strip out the most volatile categories,” said Brian Bethune, an economist at Boston College. “The Fed still has more work to do to get inflation under control.”
Markets, Policymakers React
Financial markets reacted swiftly to the hotter-than-expected inflation report. Yields on short-term Treasurys shot higher as traders increased bets for more Fed rate hikes before year-end. Stocks opened lower, with the S&P 500 index falling 1.2% in early trading.
Fed officials have signaled they intend to raise their benchmark rate to around 4.5% by early 2023 from the current range of 3% to 3.25%. Before Thursday’s report, traders saw a mixed likelihood of a quarter-point or half-point move at the Fed’s November meeting. The latest data tipped those expectations toward another big hike.
“This report reinforces the Fed’s intent to raise rates aggressively to combat inflation,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “We continue to expect another 75 basis point interest rate hike in November.”
Details of Price Increases
The September CPI report showed price increases were widespread. The indexes for shelter, food, and medical care all posted sizable monthly gains.
- Housing costs jumped 0.7%, accounting for about half of the overall monthly increase. Rents rose 0.7% while owners’ equivalent rent increased 0.6%.
- Food prices rose 0.8% with all six major grocery store categories seeing increases. Meats, poultry, fish, and eggs led the way, rising 2.0%.
- The medical care index increased 0.8% as both services and commodities contributed. Hospital services rose 1.0% and prescription drug prices were up 0.8%.
Those increases offset declines in some other categories:
- Used car and truck prices dropped 1.1%, the third straight monthly decrease. Still, they remain elevated, up 7.2% from a year ago.
- Apparel prices fell 0.3%, reversing some of the gains earlier this year.
- Airfares declined 4.7%, mirroring trends in the airline industry.
Inflation Still Above Fed Target
On a yearly basis, inflation is still running more than three times higher than the Fed’s 2% target. The central bank has been surprised this year by the persistence of high prices as supply chain problems, the war in Ukraine, and strong consumer demand have combined to keep inflation elevated.
Fed Chair Jerome Powell has said restoring price stability will likely require maintaining a restrictive policy stance “for some time”. Most officials forecast rates reaching 4.6% in 2023, according to September projections.
Thursday’s report gives policymakers further motivation to continue raising rates aggressively. However, some economists say faster inflation could prompt Fed overtightening and raise recession risks.
“We expect to see some deceleration in inflation but getting down to 2% is still quite a ways off,” Bethune said. “The question is how much damage the Fed does in trying to get us there.”
Outlook Remains Uncertain
Ongoing geopolitical risks, including the war between Russia and Ukraine, add uncertainty to the inflation outlook. A further spike in energy or food commodity prices could put renewed upward pressure on prices.
Labor market conditions will also play a key role. Job gains have remained strong this year even as the Fed tightens policy. Rising wages can filter through to higher services costs, especially in lagging categories like rents.
“Inflation has been difficult to curtail and may remain persistently high due to wage-price spirals,” Sweet said. He expects core inflation to end 2023 at around 3.4%, still well above the Fed’s comfort zone.
For consumers, it means an extended period of reduced purchasing power. High inflation has Americans experiencing the worst cost-of-living crisis in decades.
Getting inflation down will “take some time and require resolve,” Powell said last month. Markets and policymakers will be closely watching upcoming data to see if price pressure begins to materially ease.