Prices rose 3.7 percent in September as Fed keeps up inflation fight
The fight against inflation remains a bumpy one, as prices rose 3.7 percent in September over the year before, challenging the Federal Reserve’s work to tame an overheated economy.
The September report from the Bureau of Labor Statistics showed the same annual level of inflation as in August, with high housing and gas costs straining families’ budgets. Month-to-month price gains improved slightly, though, climbing 0.4 percent over August, compared with a 0.6 percent rise between August and July. That slowdown is not enough to give policymakers confidence that their inflation fight is entirely on the right track.
Meanwhile, households nationwide continue to feel the burden of prices that shot up faster than normal, and aren’t returning to pre-pandemic levels. To offset the blow, the Social Security Administration announced Thursday that seniors will receive a 3.2 percent increase in benefit checks starting next year. That’s a smaller bump than the past two years, but a signal that many older Americans are still struggling to cover the basics.
Economists said the inflation report didn’t signal significant progress, but it doesn’t require panic, either. Overall, inflation is trending in the right direction. The takeaway is that inflation remains extremely stubborn, and policymakers have limited tools to address rising costs for gas, groceries and rent.
“There are two different things: There’s what measure you want to look at to figure out the trend, and what measure you want to look at when you measure the pain,” said Douglas Holtz-Eakin, president of the American Action Forum. “The pain is the whole index. That’s what people are paying for.”
Inflation has been dizzying over the past few years, giving households and businesses little ability to plan for the future, or assurance that prices for eggs or rent won’t shoot up again. That reality is a key reason that many people are still so sour on the economy, despite its robust job market and surprising growth.
The consequences could loom large for President Biden in the 2024 election, as Republicans hunt for ways to attack the White House’s economic record, and Democrats try to sell an economy that is strong by many measures - but still leaves voters feeling otherwise.
Markets were mixed on the news. Around midday Thursday, the Dow Jones Industrial Average dipped slightly into the red, falling 91.27 points, or 0.27 percent. The S&P 500 index was essentially flat, and the Nasdaq was up 0.16 percent.
The Federal Reserve has made clear that it will not let up before high inflation is rooted from the economy. But central bankers face a key challenge: disentangling sources of inflation that could prove stickiest from those that could pass without requiring even higher interest rates.
Indeed, housing costs, namely rent, were the largest driver of September inflation, and have been a major strain on household budgets for well over a year. The hope is that rent costs will stop rising so sharply as new apartments become available. But even as there are finally signs that rent is falling from pandemic highs, it will take time for that shift to show up in overall inflation data.
Gas costs, too, were up in September, though they are simmering. The gasoline index rose 2.1 percent in September, after rising 10.6 percent in August.
Officials are also keeping a close eye on a narrower measure of price growth, known as “core inflation,” that is meant to strip out more volatile categories like food and energy. That measure didn’t budge in September compared to August, and will need to show a bit more cooling to bolster confidence that inflation is responding to the Fed’s aggressive moves.
Costs for car insurance, new cars and household furnishings were also up. But there were a few signs of progress: The index for used cars and trucks fell 2.5 percent in September, after falling 1.2 percent in August. The clothing index also fell.
Inflation has come down considerably since soaring to 40-year highs in 2022, for several reasons. Energy prices spiked following Russia’s invasion of Ukraine but have since come down. Supply chains have cleared their bottlenecks, helping cool prices for washing machines and waffle irons alike. And the Federal Reserve has moved aggressively to hoist borrowing costs and slow down the entire economy, namely by zapping demand for all kinds of investments, including home mortgages and auto loans. The Fed’s benchmark interest rate, known as the federal funds rate, stands between 5.25 and 5.5 percent, the highest level in 22 years.
Yet prices are still rising faster than normal, especially for basics like rent, groceries and gas. And while controlling inflation is the Fed’s job, voters could reinforce their discontent going into next year’s presidential election. Biden has touted the country’s low unemployment, rebound from the covid recession and infrastructure spending. But a recent Washington Post-ABC News Poll tapped into worries about inflation’s persistence.
Overall, roughly three in four Americans say the economy is not so good or poor. Even as the unemployment rate has hovered below 4 percent for more than a year, 57 percent of Americans rate the economy negatively. There are even worse ratings of gas or energy prices - 87 percent say not so good or poor - and food prices - a 91 percent negative rating.
For the Fed’s part, officials have made clear that it will keep pressure on the economy for as long as necessary, even if that means keeping interest rates higher for longer than anticipated. Officials fear that if they let up too early, the remaining sources of inflation will become even more embedded in the economy.
Part of the challenge, though, is that rate hikes are a blunt tool. They can cause banks to shy away from lending or keep mortgage rates above 7 percent, as they are now. But they can’t lower prices at the pump or build more houses for renters struggling to meet their budgets.
Until recently, the broad expectation was that higher rates would send the economy into a recession, as people pulled back on spending and businesses slashed hiring. But month after month, an entirely different picture has come into view: Consumers are still spending big on vacations, concerts and dining out. Businesses are still hiring, with employers adding a stunning 336,000 jobs in September. Fed officials expect the economy will grow 2.1 percent this year.
The flip side, though, is that such solid growth makes the Fed’s job even harder. The central bank strives for stable prices and a healthy labor market. And it can’t get prices to a more stable level of 2 percent until the economy cools to a more sustainable pace. The looming question for policymaking is what happens if progress stops short.
“There’s going to be a whole lot of debates around, ‘What if it levels out at 2.5 or 2.75?’ What should the Fed do?” said Justin Wolfers, a professor of public policy and economics at the University of Michigan. “At this point, we don’t have a sense it’s leveling out. But what we know is it’s most of the way there.”
Already, Fed officials have made clear that if the economy continues to charge ahead, they could be forced to do more with interest rates. Policymakers have signaled that they could raise rates one more time, by a modest quarter-point, before the end of the year. But even that plan has been jumbled by uncertainty in financial markets.
Yields on government bonds have shot up, especially the 10-year Treasury, a crucial benchmark that buttresses borrowing rates worldwide. Some Fed officials have hinted that higher yields could do the job of one more rate hike, lessening the need for the central bank to hike again when it convenes on Oct. 31-Nov. 1. (After that, officials have one more meeting scheduled for December.)
“If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening,” said Lorie Logan, president of the Dallas Fed, in remarks before the National Association for Business Economics on Monday.
In Ohio, John Lamb is feeling plenty of cooling already. The president of Cleveland Express Trucking said the end of the year is usually “every carrier’s best quarter,” as retailers and warehouses stock up for the holidays. There’s been a bit of a bump but nothing close to normal years.
Meanwhile, tire costs are way up. Fuel prices bounce around and make it hard to plan for the future. Customers are haggling for cheaper rates. But Lamb can’t justify those cuts at the same time he’s trying to offset costs elsewhere. In some cases, the best answer is to wait and see how his slice of the economy shakes out.
“I wanted to order three new tractors for next year, and I’m waiting now,” Lamb said. “You need spares, because things break down or they’re in for maintenance. But I can’t justify buying equipment now.”