CPI Epic Stay Updates: Inflation Rose 8.2%, Sooner Than Anticipated

Fresh inflation data released Thursday showed that the consumer prices climbed far more quickly than expected and a key measure climbed to a fresh 40-year high, bad news for the Federal Reserve as it tries to bring the most rapid price increases in four decades back under control.

Overall inflation climbed 8.2 percent in the year through September, more than what economists recently surveyed by Bloomberg expected, though a slight moderation from the 8.3 percent increase in the year through August. The rate remains extremely high.

Prices increased 6.6 percent after stripping out fuel and food — which tend to be volatile and are often removed from inflation readings to allow for a better sense of underlying trends — a notable re-acceleration in the so-called core index. That was a fresh peak for the index this year, and was the fastest pace of annual increase since 1982.

Right now, Fed officials and Wall Street analysts more closely watch the monthly figures, including what happened between August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.

And those monthly numbers offered even more pronounced reasons to worry. Overall inflation climbed 0.4 percent in September, much more than last month’s 0.1 percent reading. The core index climbed 0.6 percent, matching a big gain in the prior month. That pace is far too fast for the Fed.

Because fast inflation has lingered for more than a year and half and has broadened to an array of goods and services — and because it is proving so relentlessly rapid — central bankers are likely to remain squarely focused on cooling off the economy and wrestling it lower. They have raised interest rates five times this year and have signaled that they expect to debate an increase of a half-point or three-quarters of a point at their upcoming meeting. The new figures will likely cement the case for the bigger increase.

While Fed policy takes time to be effective, inflation is picking up in demand-sensitive sectors that the central bank thinks it can affect, so the numbers are likely to signal to policymakers that they have more work to do in slowing down consumption and the labor market and wrestling inflationary forces under control.

“This is very troubling — the trend is very troubling,” said Blerina Uruci, a U.S. economist at T. Rowe Price, who explained that the hot inflation figure probably confirmed a three-quarter point move in November and may force the Fed to remain aggressive beyond that. “It is hard to see how they build the case to step down the pace in December.”

Many economists have been expecting inflation to moderate as supply chains heal, declines in used car prices make their way to buyers and consumer demand pulls back. But that process was always expected to be gradual, as rents continued to climb and other service costs increased.

Even the expected progress is failing to materialize, though. Underlying inflation — as measured by the core index — is re-accelerating after waning earlier in the summer. Especially worrying, service industries like pet care and dental care are posting big price increases, which could be a sign that tight labor markets are pushing up wages and feeding into higher prices.

“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.”

The Fed aims for 2 percent annual inflation on average, though it defines that using a different inflation gauge: the Personal Consumption Expenditures measure, which will not be released until late October.

“It’s a pretty tough spot they’re in,” Ms. Uruci said.

— Joe Rennison contributed reporting.

President Biden on Thursday said he saw signs of progress in a government report that showed consumer prices rising faster than expected but acknowledged that his administration had more work to do to combat inflation.

“Americans are squeezed by the cost of living: That’s been true for years, and they didn’t need today’s report to tell them that,” Mr. Biden said in a statement.

The figures are likely to keep Democrats on defense ahead of next month’s midterm elections, as Republicans continue to highlight the pain of rising prices to criticize Mr. Biden for mismanaging the economy.

Core inflation, which excludes volatile food and energy prices, rose at the fastest annual pace in 40 years, dashing hopes that the Federal Reserve would soon be able to pivot away from its interest rate increases.

Searching for glimmers of hope in the disappointing data, Mr. Biden noted that headline inflation had averaged an annual rate of 2 percent over the last three months, which is a notable deceleration from the 11 percent in the prior quarter. Mr. Biden also noted that inflation continued to be a global problem that was not just affecting the United States.

“But even with this progress, prices are still too high,” Mr. Biden said.

The president said that the so-called Inflation Reduction Act that Congress passed in August would help lower energy and health care costs for millions of Americans and warned that if Republicans notched victories in next month’s midterm elections, they would make inflation worse.

“Republicans in Congress’s number one priority is repealing the Inflation Reduction Act,” Mr. Biden said. “If Republicans take control of Congress, everyday costs will go up — not down.”

But Republicans said on Thursday that it was the policies of Mr. Biden and the Democrats that have fueled the inflation surge, noting that rising prices are outpacing wage gains.

“Wages are down, prices are up, and Democrats have no one to blame but themselves,” said Ronna McDaniel, chairwoman of the Republican National Committee. “Americans know a Republican vote in November is a vote for lower prices and a strong economy.”

Markets plunged on Thursday, as investors recoiled from another hotter-than-expected inflation reading that cemented expectations for another bumper interest rate increase from the Federal Reserve next month.

The S&P 500 fell sharply lower, dropping to a loss of more than 2 percent for the day and setting a new low for the year. The fall comes after another drop on Wednesday, the sixth daily decline in a row.

U.S. government bond yields, which serve as benchmarks for borrowing costs and are influenced by Fed moves, jumped. The two-year Treasury yield soared more than 0.2 percentage points to a new high of 4.5 percent, a big move for an asset that typically moves in hundredths of a percentage point.

The Consumer Price Index report for September showed inflation rising from the prior month, the second month in a row that inflation has failed to moderate.

The new data will be crucial for informing policymakers, and therefore investors, on how much further interest rates will need to rise before inflation starts to consistently fall. The report has also taken on greater significance as investors grow increasingly worried about the effects of rising interest rates on global financial stability, following further turmoil in British government bond markets this week.

“There are a lot of people out there looking for peak inflation and a slowdown from the Fed on rate hikes, but the data is not in their favor,” said Charlie Ripley, a senior investment strategist at Allianz Investment Management. “This is going to put pressure on the Fed to do more.”

Based on prices in futures markets, which show where investors expect interest rates to be after the Fed’s upcoming meeting, the forecast is for a three-quarter-point increase. Once a rare occurrence, that would be the fourth increase of that size this year.

Investors also raised their bets on the Fed increasing rates by three-quarters of a point again in December and recalibrated expectations for how high interest rates could get next year, with a peak of around 4.86 percent in May, above the Fed’s own forecasts.

Some investors are still holding out hope for a more cautious move from the Fed, fearful that continued bumper increases in rates could push markets closer to a financial accident, similar to the shock waves in British markets in recent weeks.

Around the world, cracks are emerging that are amplifying investors’ worries. Japanese government debt has barely traded day to day, constrained by government intervention. Mortgage rates are at their highest since the turn of the century. The value of corporate bonds has tumbled. “Everything is coming to a culmination at once,” said Andrew Brenner, the head of international fixed income at National Alliance Securities.

The dollar rose on Thursday, continuing its march higher that is pressuring other economies around the world whose currencies have fallen in value.

“We are in a new regime here with higher rates,” said Mr. Ripley. “The longer they stay elevated, we are going to see some interesting things happen in the market.”

Food prices continued their steady rise in September, driven by broad increases in prices for fruits and vegetables, cereals and bakery products. The price of food rose 0.8 percent last month, maintaining the pace of growth seen in August.

The price of flour grew 2 percent from the previous month, while apples gained 5 percent and lettuce rose 6.8 percent. The price of potatoes rose 3.5 percent from the previous month, while margarine was up 4.2 percent. Prices for some items fell on a monthly basis, including milk and eggs, which had risen sharply earlier this year.

On an annual basis, the food index rose 11.2 percent.

Food inflation in the United States has remained stubbornly high this year, eroding the spending power of consumers and weighing heavily on lower-income Americans, who spend a greater proportion of their income on grocery bills.

Higher food prices are driven by a range of factors, including more expensive gasoline that farmers and grocers need to transport their products. Rising worker wages and prices for inputs like packaging and fertilizer have also driven up food costs, spilling over into higher prices at grocery stores.

Russia’s invasion of Ukraine has also disrupted exports of wheat, sunflower oil and other agricultural products, prompting shortages and pushing up food prices globally, particularly in import-dependent countries in the Middle East and Africa.

In the United States, a historic drought across the Western half of the country has lowered crop yields and raised prices for products like fruit, nuts and vegetables. Water levels on the Mississippi River have sunk to their lowest levels in decades, grounding the ships and barges that carry much of the country’s agricultural productions.

Hurricane Ian, too, has caused disruptions that will be felt through the food supply chain in the months to come. The storm damaged citrus groves and fields of tomatoes, strawberries, watermelon and other fruit across the Southeastern United States. The U.S. Department of Agriculture said Wednesday that Florida’s orange crop this year would be its smallest since 1943, even before factoring in the hurricane’s full effects.

Restaurant prices have also risen, outpacing the price gains at grocery stores in recent months. An index measuring the price of food at restaurants was up 0.9 percent monthly, while an index measuring the price of food at home gained 0.7 percent from the previous month. Domino’s Pizza raised its prices by more than 13 percent last quarter compared with the previous year, it said in its earnings report on Thursday.

Even as food prices continue to climb, the food aid offered by the federal government during the pandemic is expiring. An index for food at employee sites and schools soared 44.9 percent in September, as free school lunch programs expired.

Rent inflation continued to pick up sharply in September, fueling overall price increases and underlining that it would be difficult for the Federal Reserve to rein in consumer prices until housing costs stop jumping so much.

The cost of renting a primary residence climbed by a brisk 0.8 percent over the past month and was up by 7.2 percent in the year through September, while a gauge that approximates how much it would cost Americans to instead rent the housing they own has climbed by 6.7 percent over the past year. Those figures typically climb by rates around 3 percent per year.

Rapid increases in the cost of housing matter a lot when it comes to Consumer Price Index inflation: Lodging costs make up nearly a third of the overall measure. They also change course slowly. Today’s increases are fueled in part by a jump in rent rates on newly leased houses and apartments that started last year, and which gradually filter into official data as people renew with their landlords.

While market-based rate measures are now moderating, it could take time for that to show up in official housing statistics. Many economists expect rent increases in the Consumer Price Index to remain rapid for months to come.

Part of the challenge in driving down rent inflation is that it tends to closely reflect how much people earn and are thus capable of paying for housing. While wages are not keeping up with inflation, they have been climbing more rapidly than normal.

Economists have been carefully watching car inflation as they try to figure out what might happen next with automobile prices, and Thursday’s Consumer Price Index report offered little reason for optimism.

Cars were perhaps the most extreme example of a product rocked by the pandemic: Production slowdowns, factory shutdowns overseas, parts shortages and shipping issues combined to keep cars in short supply even as consumer demand for vehicles surged. The clash pushed prices sharply higher — so much so that used and new cars became a major contributor to overall inflation. At their most dramatic in summer 2021, used car prices climbed by a scorching 45 percent compared to the prior year (and 10 percent compared to the prior month).

Now, the supply of used cars is rebounding, and economists are looking for pre-owned vehicles to begin subtracting notably from inflation. The prices dealers pay for their inventory have been coming down sharply, but that has been taking a long time to show up in consumer prices.

Used car prices dropped in September, but not nearly as much as economists expected. They declined by 1.1 percent over the month, data showed on Thursday.

That was less than what many economists had predicted. Omair Sharif, founder of Inflation Insights, had expected them to post a 2 percent monthly decline. Ian Shepherdson at Pantheon Macroeconomics had forecast a 1.5 percent decline.

“We are sure used vehicle prices will drop sharply over the next year,” Mr. Shepherdson wrote ahead of the release.

When it comes to new cars, supply remains seriously constrained, which is limiting how much prices can fall. The Consumer Price Index data showed that prices for new cars climbed 0.8 percent in September. That made for a 10.5 percent price increase over the past year.

Auto parts are also growing rapidly more expensive: Motor vehicle parts and equipment prices climbed 13.4 in the year through September.

Gas prices fell in September, helping to bring overall inflation down slightly on an annual basis. But those falling prices were not enough to offset month-over-month inflation, which rose 0.4 percent in September.

It remains unclear whether gas prices will continue to fall. Prices at the pump have fluctuated after coming down from a record high this summer.

Gas prices fell 4.9 percent in September, according to data from Thursday’s inflation report. But the cost of gasoline has been creeping up in recent weeks as a result of temporary refinery closures and increased demand after a 98-day streak of declines ended last month. The national average price of gasoline stood at $3.913 on Thursday, according to data from AAA, a 0.2 percent decrease from the day before.

Despite lower gas prices, the overall energy index is still up 19.8 percent over the 12 months through September. Natural gas rose by 2.9 percent in September and electricity rose by 0.4 percent. While the rise in gas prices might be short-lived, energy costs are expected to rise ahead of the winter heating season as demand goes up. The increase in energy prices could pose a challenge for the Federal Reserve by complicating its campaign to lower interest rates to bring down inflation.

Gas prices give experts a sense of how the economy is doing, but they also carry political weight. The lowered gas prices were a key talking point for President Biden, who made claims about the price declines over the summer and accused energy companies of profiteering on American consumers.

“One data point, even if it comes in in a positive way, is not going to derail the Fed from its path of raising rates this year,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.

The Organization of the Petroleum Exporting Countries announced it would slash production by 2 million barrels a day on Oct. 5, a change which might cause prices to shoot up. Still, some analysts pointed out that some members of OPEC are unable to meet production quotas, which might minimize the impact of the cut.

“Consumers should anticipate that gas prices particularly going into the winter months can firm back up again,” Ms. Bartels said.

Social Security on Thursday announced an 8.7 percent cost of living adjustment for retirees, the largest inflation adjustment to benefits in four decades — a welcome development for millions of older Americans struggling to keep up with fast-rising living costs.

The cost-of-living adjustment for 2023, which will be applied to benefits in January, is based on the latest government inflation figures. The final COLA, as the adjustment is known, was released after the Labor Department announced the Consumer Price Index for September, which came in at 8.2 percent. Medicare enrollees can anticipate some additional good news: The standard Part B premium, which is typically deducted from Social Security benefits, will decline next year.

The COLA, one of Social Security’s most valuable features, will give a significant boost to about 70 million Americans next year. While retirement comes to mind when most people think about Social Security‌, the program plays a much broader role in providing economic security.

In August, the program paid benefits to 52.5 million people over age 65, but younger beneficiaries — survivors of insured workers and recipients of disability benefits‌ and Supplemental Security Income, the program for very low income people — added 17.9 million people to the total, according to Social Security Administration data.

The annual inflation adjustment has been awarded since 1975 under a formula legislated by Congress. Policy experts have debated whether the current formula accurately measures the inflation that affects retirees, but there’s little disagreement on the COLA’s importance in helping beneficiaries keep up with costs.

The New York Times examined the back story of Social Security’s inflation adjustment — how it works, how it could be revised — and how it affects pocketbooks.

The Social Security Administration on Thursday announced an 8.7 percent cost-of-living adjustment. The increase, known as a COLA, was the highest in decades and is intended to help retired and disabled Americans keep pace with the rate of inflation. The raise for 2023 will appear in benefits payments starting in January.

About 70 million Americans receive Social Security benefits, and for many of them, it is a crucial part of their income. To find answers to your questions on the adjustment, check out our explainer by Mark Miller, who writes frequently about retirement.