Inflation just crashed the party

Just as investors were starting to relax, the bill arrived and ruined the vibe.

The US Bureau of Labor Statistics consumer price index climbed 0.6% in September, bringing annual inflation up to 3.7%—hotter than forecasts of 3.6% and the highest level since May. Core CPI, which strips out volatile food and energy prices, rose 0.3% for the month to an annual gain of 2.6%, also topping projections of 2.5%.

Analysts didn’t take this news in stride. Lindsey Piegza, chief economist at Stifel, warned that inflation has hit “dangerously elevated levels.” Analyst Adam Crisafulli of Vital Knowledge admitted in a note to investors that “there aren’t many ways to sugarcoat it.”

The biggest culprit was the price of gas, which surged 9.1% and accounted for more than half of September’s increases. But the damage has seeped beyond pain at the pump. Airfare, which closely tracks fuel costs, also soared 22% from a year earlier. Petrochemical-heavy goods like apparel and toys ticked higher, too. But the effects weren’t all about oil: Price gains were broad-based across goods and services, from autos to education to recreation and beyond.

Worse yet, this inflation might not be so easy to put in the rearview mirror even if the Iran war ends tomorrow. With core CPI running at a 3.4% annualized pace over the past three months, James McCann, senior economist for investment strategy at Edward Jones, said it could signal “some stickiness.”

Another worrying sign? Americans expect inflation to hit 4.7% over the next year, according to the University of Michigan’s latest survey. Those fears could become a self-fulfilling prophecy if shoppers hustle to buy before prices rise—and before holiday shopping season adds its own special brand of sticker shock to the mix.

Fed up

These new inflation numbers put the Federal Reserve in a bit of a pickle. In September, the Fed raised rates for the first time in three years. Since then, most economic indicators have suggested that the central bank had little reason to rush into another rate hike at its next meeting October 27–28, and could probably kick this can down the road.

Today’s hotter-than-expected inflation reading changes that calculus, and Wall Street is already recalibrating: Traders now see a roughly 50% chance of an October hike, up from 22% before the CPI report landed.

Some even think just one rate hike may no longer cut it. Joseph Brusuelas, principal and chief economist at RSM US, cites “little in the way of disinflation evidence. This points towards more than one additional rate hike.”

One thing that could curb the odds of rampant rate hikes? Consumers running out of cash. BLS data shows that prices have outpaced wages for six months straight, with average hourly earnings up just 3% year-over-year. Paychecks that don’t stretch as far could dampen spending enough to cool inflation, though that could also mean a pretty sparse haul under the Christmas tree.—JD