Inflation accelerated in September as higher energy prices pushed up the cost of living, putting fresh pressure on the Federal Reserve to raise interest rates in December just one day after officials decided to hold them steady.
The latest reading of the Fed's preferred inflation gauge raises questions about how much longer policymakers can afford to wait, particularly as economic growth remains strong and inflation continues to run well above the central bank's 2% target.
Another round of hot inflation readings could even force the Fed to consider a larger, half-percentage-point increase in December, rather than the more typical quarter-point move.
"At some point -- especially if we have hot inflation readings in November like October -- investors are increasingly likely to begin questioning the commitment to price stability at 2% which could lead to a need to hike by .5% in December," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.
Core personal consumption expenditures prices, which exclude volatile food and energy costs, rose 0.3% in September from the prior month and 3.1% from a year earlier, according to data released Thursday. Both figures matched economists' expectations but accelerated from August's respective increases of 0.2% and 3%.
Overall inflation rose even faster, reflecting higher oil prices. Headline PCE increased 0.5% in September and 3.61% from a year earlier, up from 0.3% and 3.4%, respectively, in August.
Both headline and core inflation reached their highest annual rates since May. The report also marked the 68th consecutive month that PCE inflation has exceeded the Fed's 2% target.
The data comes at a pivotal moment for the central bank. December will be the final opportunity for the current group of voting policymakers to raise rates before a more dovish contingent rotates onto the Fed's rate-setting committee in January.
At Wednesday's meeting, Cleveland Fed President Beth Hammack and Governor Lisa Cook dissented from the decision to hold rates steady at 3.75%-4%, favoring a quarter-percentage-point increase instead.
Fed Chair Kevin Warsh offered little indication of what would prompt policymakers to act in December, saying only that the coming six weeks would be "information rich."
One question facing officials is whether higher energy prices will lead to more persistent inflation across the economy, or whether the latest increase will prove temporary. Higher interest rates could limit consumer demand and keep inflation in check, but the Fed doesn't have the power to reduce energy prices.
Gasoline and other energy goods accounted for $45.7 billion of the $113.1 billion increase in consumer spending in September, roughly equivalent to the combined increase in spending on healthcare, housing and utilities, and food services.
Thursday's report also showed signs that households are coming under pressure. Personal income rose by 0.2% in September, while real disposable income, which adjusts for inflation, also increased 0.2%. Both figures fell short of expectations.
That highlights "the growing pressure on household budgets as prices continue to rise faster than paychecks. Consumers are still spending, but the margin for error is narrowing," said Brent Kenwell of eToro.
The inflation report came alongside a third-quarter GDP reading that offered a different picture of the economy. Economic growth surged to 3.4%, driven largely by an increase in artificial intelligence investment. Economists had expected 3% in growth.
That stronger GDP data could give the Fed more room to raise rates to combat inflation. But with household finances showing signs of strain, policymakers face a difficult decision about how aggressively to act when they meet again in December. The CME FedWatch tool puts the likelihood of a half-point increase in December at zero; odds of a quarter-point move are at 80%, and a hold at 20%.
Warsh offered some insight into how he is weighing those risks on Wednesday. Asked by Barron's whether the Fed had a mandate to sustain economic progress in America, he emphasized the consequences of allowing inflation to remain elevated.
"If you were trying to do the most harm to the least well off among us, you would let the last six years of inflation above the Fed's target -- usually well above the Fed's target -- you'd let that continue," Warsh said.
Addressing elevated inflation, he said, is "the most important thing we can do as we look out the window, and that's what we plan to do."
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