September CPI gains 3.7% annually after 0.3% monthly gains in August, September

Thursday PCE forecast puts year-over-year headline rate at 3.6%, core at 3.1%

September inflation data underline the Federal Reserve’s task. The Associated Press reported that consumer prices rose 3.7% from a year earlier in September, an increase much bigger than the 2.4% rate in February just before the Iran war. On a monthly basis, the consumer price index, the most widely followed inflation gauge, rose 0.3% in both August and September. At that pace over a full year, inflation would rise much more quickly than the Federal Reserve’s 2% target.

For Thursday’s release, the Associated Press forecast the personal consumption expenditures price index, a measure more closely followed by the Federal Reserve, to rise 3.6% from a year earlier in September, up from 3.4% in August. The Associated Press also forecast core prices, which exclude food and energy categories, to rise 3.1% from a year earlier in Thursday’s release, up from 3% in the previous month.

Separately, at its Oct. 28 vintage, FRED’s PCEPI series showed a 3.42% year-over-year change. That observation is distinct from the Associated Press’s Thursday forecast.

Other parts of the economy are already being hit by higher rates, which market forces lifted even before the Federal Reserve increased its key rate last month. The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month, though it has since slipped a bit. FRED’s 30-year fixed mortgage series put the rate at 7.32% on Oct. 28. Oxford Economics, a consulting firm, estimated that higher mortgage rates have made buying a home unaffordable for 5 million more Americans since the beginning of the year. Over time, Federal Reserve rate hikes can make mortgages, auto loans and credit-card borrowing more expensive, adding to Americans’ sense that homes and cars are getting pricier.

Aditya Bhave, head of U.S. economics at Bank of America, said economists and the Federal Reserve had gotten too complacent about above-target inflation. He said higher oil and gas prices will likely keep inflation elevated for several more months, while rising diesel costs will elevate shipping prices for nearly every type of good and could spread inflation more broadly through the economy. “Unless the Fed takes this problem more seriously and stops essentially making excuses about inflation, I think we’re not going to get back to 2% until the next recession,” Bhave said.

The central bank, led by Chairman Kevin Warsh, wants to return inflation to its 2% target, which it typically does by raising its short-term interest rate. Higher borrowing costs, over time, can cool spending and slow inflation. The Federal Reserve raised its key rate last month for the first time in three years, from about 3.6% to 3.9%, a move many investors and economists perceived as a first step toward a renewed effort to bring down inflation.

The Associated Press reported that the Federal Reserve was expected to keep its key interest rate unchanged at Wednesday’s policy meeting as inflation accelerated over the previous couple of months and the Iran war caused spikes in oil and gas prices. If the Federal Reserve keeps rates on hold, Warsh will be pushed to explain why the central bank hiked in September but not this month. The meeting concludes less than a week before the midterm elections, which have focused heavily on concerns about the cost of living and affordability. The Associated Press reported that consumers had generally soured on an economy weighed down by more expensive gas, groceries and clothing, among other items.

President Donald Trump criticized the Federal Reserve for raising its key rate last month, though he largely blamed the central bank’s rate-setting committee rather than Warsh, whom he appointed. The Associated Press reported that some of the forces driving inflation, specifically the rapid buildout of artificial intelligence infrastructure and higher energy prices, would not easily be tamed by higher interest rates.

After the Federal Reserve announces its decision, Warsh will speak at a news conference, where his remarks will be closely watched for hints about the central bank’s next steps. He will likely repeat the Federal Reserve’s desire for a “timelier” return of inflation to the 2% target. Some may view that as a sign the central bank will raise its key rate at its next meeting in December, a move already widely expected by Wall Street investors. Warsh will likely seek to keep the Wednesday press conference relatively short: it lasted about 30 minutes last month, while his predecessor, Jerome Powell, often held news conferences for about 45 minutes.

The Federal Reserve’s policy meeting is part of a busy week for central banks around the world. The Bank of Canada will also meet Wednesday and is forecast to lift its key rate by a quarter point, to 2.5%. Policymakers at the European Central Bank and the Bank of Japan are scheduled to meet Thursday and are expected to keep their key rates unchanged.

The Associated Press reported that the U.S. economy is growing at a healthy pace and unemployment remains low, at 4.2%, even if hiring is also sluggish. The government is scheduled to report Thursday on growth for the July-September quarter, which data provider FactSet expects to reach 3%, up from 2.2% in the April-June quarter. Many economists argue that solid growth is evidence that interest rates are not particularly high and the economy could withstand higher rates to combat inflation.