Prices Rise Faster Than Expected
The Consumer Price Index rose 8.2 percent in the year through September, another stubbornly high result driven by more costly food, rent and other items.
Here’s what you need to know:
The Consumer Price Index report for September, released Thursday, showed that painfully rapid price increases continued to trouble Americans and bedevil the Fed. Here are the takeaways:
- Inflation remains relentless. The overall index climbed 8.2 percent in September versus the prior year, a slight moderation from 8.3 percent the previous month — but that was because gasoline prices had fallen, a trend that has since reversed. Practically every other detail of the report was worrying.
- By some metrics, inflation is hitting new highs. Stripping out food and fuel to get a sense of underlying price trends, the so-called core index climbed by 6.6 percent, the fastest pace since 1982 and more than economists had expected.
- The monthly change in prices is also worrying. It offers a snapshot of the latest trends — and those month-to-month figures looked bad. The price index picked up by 0.4 percent from August, double what economists had expected, and the core measure rose by 0.6 percent on a monthly basis.
- Rents are still climbing sharply. The cost of renting a primary residence climbed a brisk 7.2 percent in the year through September. That measure typically climbs around 3 percent per year, and housing costs matter because they move slowly and make up a big chunk of overall inflation.
- Other services are becoming much more costly. From pet care to dental visits, prices for a wide range of services are up a lot. That’s worrying, because it suggests that wage increases — a major cost for service providers — may be feeding into higher prices.
- Keep an eye on cars. A long-awaited slowdown in goods prices isn’t happening as quickly as hoped, and cars are a case in point. Used car prices dropped in September, but not nearly as much as economists expected. Meanwhile, new car prices and car parts continue to increase sharply in price.
- For the Fed, this probably locks in a big November rate increase. Central bankers have raised interest rates five times this year and are expected to make a fourth jumbo sized, three-quarter-point move at their meeting on November 2. Raising rates cools demand and is the Fed’s main tool for trying to wrestle inflation back under control.
- This is bad news for Democrats ahead of the midterms. Although President Biden said he saw signs of progress in the report, “prices are still too high,” he said in a statement. Republicans can draw on many details from the report to highlight the squeeze on consumers’ wallets ahead of next month’s midterm elections, sharpening their criticisms of Mr. Biden’s management of the economy.
Understand Inflation and How It Affects You
Markets swung wildly on Thursday after another hotter-than-expected inflation report cemented expectations for more bumper interest rate increases from the Federal Reserve that some investors worry could destabilize the financial system.
The S&P 500 initially dropped by more than 2 percent, setting a new low for the year, before rallying back to end the day 2.6 percent higher, an unusually big turn within a single day.
U.S. government bond yields surged markedly higher, adding to the turbulence. The two-year Treasury yield, which is influenced by expectations for interest rates, soared by roughly 0.2 percentage points to a new high of around 4.5 percent, a big move for an asset that typically moves in hundredths of a percentage point.
The trigger for the market swings was the Consumer Price Index report, which realized investors’ fears about persistent inflation, showing prices rising faster than expected, at an 8.2 percent rate in the year through September.
The new data is 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.”
The sharp reversal in the stock market puzzled analysts. Some said that easing pressure on British government bonds, with yields falling sharply on Thursday, offered a tailwind that lifted the stock market through the day, as it helped the British pound to strengthen, weakening the dollar and bolstering stocks.
But such whipsaw moves have also simply become more common this year, as data on the U.S. economy has collided with technical factors in markets around how investors are positioned for sharp moves higher or lower, and whether they exacerbate or reduce them.
The rally on Thursday came after another drop on Wednesday, the S&P 500’s sixth daily decline in a row, meaning stock prices had already fallen substantially, even before the fresh inflation data roiled the market. The last time the index experienced seven straight days of losses was during the onset of the coronavirus pandemic at the end of February 2020.
In a sign of the gyrations affecting the market, the CBOE Vix index, which tracks stock volatility and is known as Wall Street’s “fear gauge,” remains elevated, as does the MOVE index, which measures volatility in the Treasury market.
The sharp moves have added to investors fear that the Fed’s campaign of large rate increases could push markets closer to a financial accident, similar to the shock waves in British markets in recent weeks. Some investors said that the hotter-than-expected inflation reading raised this risk by increasing expectations for further rate increases.
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 4.9 percent in May, above the Fed’s own forecasts.
Barclays’ economists quickly altered their own forecast, predicting the Fed would raise interest rates by three-quarters of a point in November and December, as well as a half-point increase in February, taking interest rates past 5 percent next year.
“We are in a new regime here with higher rates,” Mr. Ripley said. “The longer they stay elevated, we are going to see some interesting things happen in the market.”
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 and loans has tumbled.
“Everything is coming to a culmination at once,” said Andrew Brenner, the head of international fixed income at National Alliance Securities.
The reassessment over the path of interest rates comes as companies begin to announce their financial results for the third quarter, giving investors a chance to see how rising rates are impacting business conditions.
BlackRock reported earnings on Thursday, with the asset manager’s chief financial officer Gary Shedlin saying that the drastic fall in bond and stock prices, with the S&P 500 down over 25 percent this year, has resulted in $2 trillion being wiped off the value of the assets the company manages since the end of 2021, taking its assets under management to just below $8 trillion.
“The speed at which central banks are raising rates to rein in inflation alongside slowing economic growth is creating extraordinary uncertainty, increased volatility and lower levels of market liquidity,” said Larry Fink, BlackRock’s chief executive.
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.
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. Mr. Biden tried to cast the figures in a positive light while empathizing with the cash crunch that Americans are experiencing.
“Americans are squeezed by the cost of living,” Mr. Biden said at an event in Los Angeles. “It’s been true for years and folks don’t need to see a report to tell them they’re being squeezed.”
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 affecting just the United States.
“The price of gas is still too high and we need to keep working to bring it down,” Mr. Biden said. “We also need to make more progress bringing down the prices across the board.”
Mr. Biden met with his top economic advisers on Thursday for a briefing following the release of the data.
“While here in the United States, the Federal Reserve has primary responsibility in price stability, our administration is committed to doing what we can to bring down costs for families, including by addressing supply chain challenges and lowering the costs of essentials like health care,” Treasury Secretary Janet L. Yellen said as she met with European officials in Washington.
Brian Deese, the director of the National Economic Council, said that the Biden administration was squarely focused on finding ways to bring down the cost of energy and housing for Americans.
“We have identified and been focused for some time now, on every measure we can take to try to increase the supply of housing, particularly affordable housing and multifamily housing,” Mr. Deese said in an interview before he spoke to City Club of Cleveland on Thursday. “There are actions that we can take and will take administratively and there’s also something that we’ll be talking to Congress about.”
The president said in a statement he released on Thursday morning that the so-called Inflation Reduction Act passed by Congress 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 No. 1 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 the policies of Mr. Biden and the Democrats had 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.”
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.
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Isabella Simonetti
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.