WASHINGTON — Consumer prices rose 6.2% in the 12 months through October, the fastest annual increase in more than three decades, as inflation broadened beyond pandemic-sensitive categories and reached essentials including food, housing and energy.
The Consumer Price Index increased 0.9% in October alone after a 0.4% gain in September, the Labor Department reported Wednesday. The CPI release showed energy prices up 4.8% for the month and 30% over the year, while food prices rose 5.3% from a year earlier. Gasoline increased 6.1% in October and nearly 50% over 12 months.
Inflation is no longer confined to a few reopening categories
Earlier in the year, much of the inflation surge was concentrated in used vehicles, airfare, hotels and other categories distorted by the reopening of the economy. October’s report is harder to dismiss as a narrow reopening effect. Shelter, which carries a large weight in the index, rose 0.5% in the month. New-vehicle prices climbed again, used vehicles reversed part of their recent decline, and grocery prices continued to advance.
Producer costs also remain elevated. The Labor Department’s producer-price report showed the final-demand index up 8.6% over the year through October, matching the largest increase in the series. Businesses facing higher input, freight and labor costs have increasingly indicated that they are passing at least some of those increases to customers.
The pressure is visible in wages after inflation. Average hourly earnings have been rising rapidly in nominal terms, particularly in lower-wage industries struggling to fill positions, but the government’s real-earnings data show that inflation is eroding those gains for many workers. Real average hourly earnings declined over the year when adjusted for the rise in consumer prices.
Demand remains strong while supply remains constrained
Inflation is being driven by an unusual collision of forces. Household demand recovered quickly with the help of fiscal support, accumulated savings and reopening, while production networks have been constrained by semiconductor shortages, port congestion, transportation bottlenecks and uneven global factory output.
Government data released before the CPI report already showed substantial price pressure in the Federal Reserve’s preferred measure. The Commerce Department’s PCE report showed the personal-consumption expenditures price index up 4.4% over the year through September, with energy up 24.9% and food up 4.1%.
The labor market is also tightening. Employers added 531,000 jobs in October and the unemployment rate fell to 4.6%, according to the Labor Department’s jobs report. Strong hiring supports household income and demand, but widespread vacancies are also pushing employers to raise pay, adding another potential source of cost pressure.
The Federal Reserve begins pulling back support
The inflation report arrives one week after the Federal Reserve announced that it would begin reducing its monthly bond purchases. In its November statement, the central bank said inflation was elevated largely because of factors expected to be transitory, including supply-and-demand imbalances related to the pandemic, but it also acknowledged broader economic progress.
The Fed has kept its benchmark interest rate near zero, arguing that the labor market has not fully recovered and that some inflationary forces should ease as supply constraints improve. October’s data intensify the question of how long policymakers can maintain that stance if price increases remain broad and persistent.
Interest-rate markets have already begun pricing a greater chance of earlier tightening. The risk for the Fed is two-sided: raising rates too quickly could slow employment gains, while waiting too long could allow inflation expectations and wage-price dynamics to become more entrenched.
Households feel the difference before policy changes arrive
For consumers, the debate over how persistent inflation will be is less immediate than the effect on weekly budgets. Energy, groceries, rent and vehicles are difficult expenses to postpone. Higher gasoline and heating costs are particularly visible entering the winter, and elevated vehicle prices have made replacement cars unusually expensive.
Inflation also interacts with government benefits. Social Security recipients are scheduled to receive a 5.9% cost-of-living adjustment in 2022, the largest in decades, but higher Medicare premiums and rising consumer prices will determine how much of that increase translates into additional purchasing power.
The October CPI does not establish that today’s inflation rate will persist indefinitely. Supply chains can improve, energy prices can reverse and demand can rotate as pandemic conditions change. But it does establish that the inflation problem has become broader than a handful of reopening categories. At 6.2%, price growth is now a central economic constraint for households, businesses and policymakers alike.