WASHINGTON (TNND) — Surging prices for energy and other goods sparked renewed pressure on prices last month, pushing inflation to a recent high and raising questions about how long the Federal Reserve can afford to wait before raising interest rates again.
Consumer prices climbed 3.7% in September compared to the year prior, up from 3.4% in August. On a monthly basis, inflation accelerated by 0.6%, the biggest monthly jump since the early days of the war with Iran.
The continued climb in prices highlights the ongoing impact the war with Iran has had on energy prices around the world and the growing risks higher fuel costs will spread throughout the economy. Prices also climbed across other categories that are impacted by fuel costs. Airfare jumped 22% from a year earlier, while costs for apparel and toys that are sensitive to shipment costs and tariffs also moved higher.
The longer energy prices are elevated, the greater the risk of businesses passing higher transportation and production costs onto consumers, creating the risk of an energy shock becoming a more persistent source of inflation.
Core prices, which exclude food and energy, increased by 2.6% year-over-year and 0.3% from a month earlier. A continued increase in core inflation is a sign price pressures are expanding beyond areas that are more sensitive to swings in energy prices.
“The core inflation rate is more concerning, as it is more informative of the larger trends in the economy. The Fed raised interest rates in the middle of September, so these inflation numbers don’t fully incorporate those effects, but they do suggest that the Fed’s fight with inflation is not close to being won,” said Competitive Enterprise Institute senior fellow and economist Jeremy Nighohossian.
The massive data center build-out to power artificial intelligence is also a significant contributor to inflation with robust demand for computer chips, equipment and electrical components that also go into consumer goods like laptops and smartphones.
Wages have also struggled to keep up with the pace of inflation in recent months. Average hourly earnings fell 0.5% in August when adjusted for inflation and are down 0.7% compared to a year ago. Hot inflation and slowing wage growth means Americans are earning less for their time worked and budgets are not going as far, raising questions about how long consumers can sustain the levels of spending that have kept the U.S. economy afloat despite years of higher prices and uncertainties.
“Today’s CPI figures are a reminder that the pressure on household budgets has not let up,” said Kath Gramling, global consumer goods, retail and travel lead at Accenture. “While seasonal shopping moments such as back-to-school may have provided a lift for retailers and brands, consumers are still navigating higher prices and making tougher spending decisions, approaching every purchase with discipline, prioritizing value and stretching each dollar as far as it will go.”
Inflation has been running hot for more than five straight years, fueling frustrations for American consumers about the cost of living and the state of the economy. Facing gas prices over $4 a gallon and higher expenses for food and other necessities, voters are increasingly aiming their frustrations at President Donald Trump and Republican majorities in Congress.
Wednesday’s inflation report is the final major price data to be released before the midterm elections, creating a challenge for Republicans’ closing messaging about their management of the economy. Public opinion surveys have increasingly found voters do not approve of Trump’s handling of the economy and that voters trust Democrats more to deal with affordability.
The hot inflation report also underscores the challenges facing the Fed. Most economists are anticipating the central bank to raise its benchmark interest rate at least one more time this year, though it is unclear on the timing. Officials will meet next week and then again in December.
Before Wednesday’s release, several officials have said they could afford to wait to see how the economy responds to the quarter-point hike that was approved during the September meeting. It’s unclear whether a single inflation report will be enough to persuade officials to change their stance, but markets are pressuring officials to act.
Markets are pricing in a hold at the October meeting with a roughly 59% chance, according to CME FedWatch. Investors view a hike in December as virtually certain, with a quarter-point bump at 57% and a half-point increase at around 37% as of Wednesday afternoon.
How far the Fed will have to hike rates is also an open question moving forward, including within the central bank. Eight of the 18 Federal Open Market Committee members who gave a forecast after the September meeting projected one more increase in 2027, though other officials have signaled one more may be enough to bring inflation back toward the 2% target sometime next year.
“I haven’t changed my view that it may be appropriate to have one more rate hike,” New York Federal Reserve President John Williams said Tuesday in an interview with Bloomberg News. “I don’t think at this time I have any reason to believe that we would need to do more.”