U.S. consumer prices rose 8.2% over the 12 months through September, while inflation excluding food and energy accelerated to 6.6%, its fastest annual pace since August 1982. The Bureau of Labor Statistics’ September Consumer Price Index showed that falling gasoline prices were not enough to offset persistent increases in shelter, food, medical care and other services.

The report complicates hopes that four large Federal Reserve interest-rate increases this year have already broken inflation’s momentum. Headline inflation has eased from June’s 9.1% peak, but underlying prices remain broad and stubborn. On a monthly basis, the CPI rose 0.4%, while the index excluding food and energy rose 0.6% for a second consecutive month.

Core inflation becomes the central concern

Energy prices declined 2.1% in September, including a 4.9% fall in gasoline. Yet shelter costs rose 0.7% during the month, and both rent of primary residence and owners’ equivalent rent posted substantial gains. Food prices rose 0.8% and were 11.2% higher than a year earlier; groceries consumed at home were up 13.0%.

Those details matter because the components now pushing inflation are less sensitive to immediate swings in commodity prices. Housing rents adjust gradually, service businesses rely heavily on labor and food inflation reflects a combination of agricultural, transportation and processing costs. That makes a rapid return to the Federal Reserve’s 2% inflation objective increasingly difficult.

Producer prices also remain elevated. BLS reported in its September Producer Price Index that final-demand prices rose 0.4% during the month and 8.5% over the year. Producer inflation has slowed from earlier peaks but continues to signal cost pressure moving through supply chains.

Workers gain wages but lose purchasing power

Nominal wages continue to rise, yet inflation is eroding much of the increase. BLS’s real earnings report showed inflation-adjusted average hourly earnings falling 0.1% from August to September and 3.0% over the year. Real average weekly earnings were down 3.8% from a year earlier.

That loss of purchasing power explains why the inflation debate is being felt well beyond financial markets. Households are paying materially more for groceries, rent, utilities and transportation even as unemployment remains low and paychecks grow. The burden is particularly significant for lower-income families, which spend a larger share of their budgets on necessities.

Nominal retail sales were essentially flat in September, according to the Census Bureau’s advance retail report. Because those figures are not adjusted for inflation, stable dollar sales can mask declining real purchasing volumes when prices are rising rapidly.

The Federal Reserve sees little room to ease

The Federal Reserve raised its policy rate by three-quarters of a percentage point in September, and the minutes released October 12 show officials broadly committed to moving policy into restrictive territory. Participants emphasized that inflation remained unacceptably high and that restoring price stability would likely require a period of below-trend growth and softer labor-market conditions.

The Fed’s September economic projections put the median federal funds rate at 4.4% at the end of 2022, far above where it began the year. The projections also anticipated higher unemployment and weaker growth as the central bank attempts to restrain demand.

September’s core CPI reading strengthens the case for another large move at the Fed’s next meeting. The problem is not simply that prices are high; it is that inflation remains widespread even after gasoline costs have retreated. A central bank that slows tightening too soon risks allowing expectations and pricing behavior to adjust to persistently high inflation.

Inflation is slowing in some places, not enough in the aggregate

There are signs of improvement beneath the headline. Gasoline is cheaper than it was during the summer peak, some goods prices are softening as supply chains normalize, and a decline in job openings suggests labor demand may be starting to rebalance. Contemporary reporting on the September inflation report nevertheless emphasized that rent and food costs are keeping pressure on consumers even as energy eases.

The next phase of the inflation fight will depend heavily on housing, wages and services. Those categories generally adjust more slowly than gasoline or used vehicles and are closely tied to domestic demand. If monetary tightening reduces hiring, credit growth and housing activity without producing a severe contraction, inflation could continue to moderate. If services and rents remain strong, the Fed may need to maintain high rates longer.

For now, the September data show an economy caught between two realities: inflation has retreated from its summer high, but the measure most closely watched for underlying pressure has accelerated to a 40-year high. That is unlikely to satisfy policymakers — or households whose wages still buy less than they did a year ago.