Inflation heats up as rising costs threaten to spread beyond energy

WASHINGTON (TNND) — Inflation accelerated last month as soaring energy prices continued to drive up costs across the economy, increasing pressure on the Federal Reserve to raise interest rates when it meets in December.

Prices climbed by 3.6% in September from last year, an increase from 3.4% in August. On a monthly basis, inflation increased by 0.5%, the highest rate since May, the Commerce Department reported on Thursday. Goods prices climbed 3.9% year over year, while service prices jumped 3.5% compared to last September.

Inflation has climbed since the war with Iran brought significant jumps in oil, gas and diesel prices, increasing the cost of energy and transporting goods. Oil has cost more than $100 a barrel for most of the time since the war broke out in February outside of a short stretch this summer when a fragile ceasefire was in place.

But even when stripping out the volatile food and energy categories, underlying inflation is still getting worse. Core prices increased 3.1% in September from a year ago and 0.3% from August, well above the Fed’s target of 2%. The continued pressure on core prices is raising concerns that higher energy costs are spreading across more sectors of the economy. Durable goods inflation for products like motor vehicles and laptops increased last month, while services such as higher airfare and hotel prices became more expensive.

“The US still has an inflation problem and it’s getting worse again,” Navy Federal Credit Union chief economist Heather Long wrote on X. “Inflation is back near a 3-year high. It’s largely due to war in Iran, but there’s legitimate concern that inflation is spreading beyond energy.”

The renewed pressure on inflation comes a day after the Fed opted to keep its benchmark interest rate steady at a range of 3.75% to 4% in a 10-2 vote. The two dissents were in favor of increasing rates on Wednesday rather than waiting until December. Thursday’s data is likely to reinforce positions for the Fed to raise interest rates again.

After the meeting, Fed Chairman Kevin Warsh said the economy was strong but that there was still work to do on inflation and that he did not view current conditions as restrictive. While Warsh did not offer any guidance on what the central bank may do next, markets are widely anticipating a quarter-point rate increase at the December meeting.

Economists and the Fed are closely watching to see if record diesel prices that increase costs for the creation and transport of goods get passed onto consumers. A gallon of diesel averaged $6.33 a gallon as of Thursday, compared to $3.68 a year ago, according to AAA. Jet fuel prices have also spiked, adding another price pressure on the cost of transporting goods.

Signs of those costs hitting producers are already hitting after wholesale inflation jumped 6.3% in September from a year ago, the highest rate since 2022. Wholesale prices can give clues about future consumer inflation as businesses weigh whether to absorb higher costs or pass them on to their customers and further entrench inflation.

The artificial intelligence boom is also pushing inflation higher as tech companies invest massive sums to build data centers across the country, creating insatiable demand for computer chips, electrical components and other inputs that are also used in consumer goods. There are concerns among some economists that the AI boom will be largely unmoved by higher rates and become a stubborn source of inflation.

Despite nearly six years of elevated inflation and recent struggles with wages keeping pace with price increases, consumers have kept up their spending to keep the U.S. economy on track. A separate report released Thursday showed consumer spending grew at a 3.8% clip in the third quarter as the economy grew a robust 3.4%.

But there are questions about how long consumers can afford to maintain their levels of spending. While upper-income Americans bolstered by stock gains can afford to keep up, others are seeing inflation shrink their purchasing power as wage gains have fallen behind.

Adjusted for inflation, incomes fell by 0.3% last month after struggling to keep pace with inflation for much of the year. The personal savings rate also fell to 3.8%, the lowest since October 2022, indicating more households have less wiggle room in budgets and may be dipping to savings to cover costs. Relying on credit to finance purchases is also getting more expensive as the Fed increases rates and bond yields, which influence borrowing costs for consumers, remain elevated.