US inflation rises to 3.7% in September as gasoline and heating oil costs climb

Inflation accelerates beyond forecasts

The Labor Department reported on Wednesday, 14 October, that consumer prices in September were up 3.7% from a year earlier, compared with 3.4% in August. Economists surveyed by FactSet had expected 3.6%, while prices rose 0.6% from August to September, the biggest monthly increase since April. Core prices, which exclude food and energy, rose 2.6% year on year, a larger annual increase than in August.

Energy costs drive the increase

Energy prices were 20.4% higher than a year earlier and rose 5.2% from August, according to the Consumer Price Index report cited by The New York Times. Gasoline was up 34% year on year, while heating oil climbed about 74%. The American Automobile Association put the average price of a gallon of regular gas at $4.33 on Wednesday, more than 40% above the level a year earlier. Diesel stood at $6.30, 72% higher than a year ago, and airline fares rose 22.4% over the same period.

Political pressure before the midterms

The fuel price rise puts Republicans under pressure ahead of the midterm elections on 3 November. Trump had promised to contain inflation and has repeatedly attacked the Federal Reserve, calling for rate cuts without success. An AP-NORC poll found that only 17% of US adults approve of his handling of the cost of living, and 26% approve of his handling of the economy overall. A Reuters/Ipsos poll cited by Greek business daily Naftemporiki found 78% of Americans hold Trump's policies, including tariffs and the Iran war, responsible for rising prices.

Based on our forecast, the US central bank will leave its key interest rates unchanged at its next meeting in October, but a rate increase in December appears set.

Dirk Chlench, an economist at the state bank LBBW, expects inflation to approach or exceed 4% in the coming months. The Federal Reserve has its policy meeting on 27 and 28 October, and most Wall Street investors expect it to hold rates then.

Fed and household costs

Fed Chairman Kevin Warsh said last month that inflation was not moving quickly enough back to the central bank's target, a view that led the Fed to raise rates for the first time in three years, to about 3.9%. Warsh added that inflation reports over the summer did not show that underlying trends had meaningfully improved.

Wages rose just 3% in September, so workers' buying power has eroded over the past year. Social Security benefits will rise 3.6% in January, an increase of about $75 a month for the average recipient, which the Social Security Administration announced shortly after the inflation report. Advocates welcomed the increase, but critics said it would not reflect higher health care costs for many seniors.

War costs for households

CNN, citing an estimate from Mark Zandi, chief economist at Moody's Analytics, put the cost of the Iran war to US consumers at about $265 billion since its start in late February. Zandi estimated an average household's spending had risen by about $2,000, of which around $1,100 went to energy and transport costs, with about $540 tied to higher interest rates and $360 to the military operations themselves.