Higher Inflation Could Be Here for Awhile

September price increases signal elevated inflation could last

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Prices for food, energy, housing, and a broad range of items continued to creep up in September, crimping household budgets and fueling fears of longer-term inflation. 

Key Takeaways

  • Consumer prices in September rose to 5.4% over the year before, matching June and July for the highest inflation rate since 2008.
  • Basic necessities like food, energy, and housing accounted for most of the increase. 
  • Economists took the new inflation report as evidence that high inflation is going to last longer than previously thought.

The Consumer Price Index, which measures prices for pretty much everything consumers buy, rose 0.4% compared to the previous month, the Bureau of Labor Statistics said in its monthly inflation report Wednesday. That made for a 5.4% increase over the same time last year, matching June and July for the highest yearly inflation rate since 2008.

Increases in the cost of necessities such as groceries, energy, and housing contributed heavily to the overall figures. Without factoring in food and energy (whose prices tend to swing more unpredictably), price increases were more tame, rising 0.2% compared to the previous month and making for a 4% annual increase, the same as in August, but putting a stop to the downward trend of the two previous months.

September's numbers underscore that “inflation is not about to quietly fade away,” Sarah House, an economist at Wells Fargo Securities, wrote in a commentary. Because of the increase in the cost of basics, September was “particularly painful for consumers,” she said.

Indeed, energy rose 1.3% compared to the previous month, costing 24.8% more than it did a year ago and highlighting the big hit that fuel costs have imposed on households lately. Groceries increased 1.2% on the month, for a year-over-year increase of 4.5%. Shelter increased 0.4%, reflecting rising costs of both rent and home ownership

On the other hand, air fares got 6.4% cheaper than the month before—economists attributed the drop to a decline in travel caused by the delta variant of COVID-19—and clothing prices fell 1.1%, possibly because fewer people were buying business clothes while working from home. Used cars, which had spiked earlier in the year, fell 0.7% compared to the month before.

Inflation has been heating up since the beginning of the year as the economy recovers from the pandemic, and economists have debated whether the price increases are just a blip brought on by supply chain problems that will work themselves out fairly quickly, or if they’re a longer-term problem that could threaten the economy. The September report indicates those supply chain issues are taking longer than expected to resolve, economists at CIBC Capital Markets said in a commentary Wednesday. 

One bright spot for workers—if not employers—is that as fast as prices are rising, pay is rising faster amid an ongoing labor shortage that has talent in high demand. Growth in hourly earnings outpaced price increases by 0.2% in September, the BLS said, the second month in a row that so-called “real hourly earnings” have gone up. 

In addition to directly affecting your pocketbook, higher prices influence whether policymakers at the Federal Reserve will try to bring inflation under control by pulling back the monetary support it gave to the economy after the pandemic hit. The Fed has aimed for a 2% inflation rate over the long term, and while it has said it would allow inflation to run higher for some time after that, some economists took September’s reports as an indication that inflation is proving to be more persistent than the “transitory” spike the Fed expected as supply chains impacted by the pandemic untangle themselves.

Economists have been watching this closely, since the Fed’s actions—either raising interest rates earlier than expected or withdrawing monetary support—could impact the stock market, mortgage interest rates, and the financial system in general.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.