People shop for bread at a supermarket in Monterey Park, California on October 19, 2022.
Frederic J Brown | AFP | Getty Images
Inflation was cooler than expected in October, although household items like shelter, food and energy continued to be among the biggest contributors to consumer prices, which are still rising at a historically fast pace, the US Bureau of Labor Statistics said on Thursday.
Inflation is a measure of how quickly the prices consumers are paying for a wide range of goods and services are increasing.
The consumer price index, a key barometer of inflation, rose 7.7% year on year in October – the smallest 12-month rise since January. According to the Dow Jones, economists were expecting an annual increase of 7.9%. Basically, a shopping cart of goods and services that cost $100 a year ago costs $107.70 today.
The annual rate has fallen from the pandemic-era peak of 9.1% in June and 8.2% in September, but is hovering near the highest level since the early 1980s.
“That’s obviously still very high,” said Andrew Hunter, chief US economist at Capital Economics, of October’s reading. “But at least it’s a step in the right direction.”
A fall in the annual rate of inflation does not mean that the prices of goods and services have fallen; it just means prices aren’t going up as fast.
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While annual headlines are generally easier for consumers to understand, the monthly change is a more accurate measure of near-term trends, meaning whether inflation is accelerating or decelerating, economists said.
According to the BLS, CPI rose 0.4% from September. Economists were expecting a monthly increase of 0.6%.
“Over the past year to 18 months, we’ve seen a lot of 0.4%, 0.5%, 0.6%,” Hunter said. “That’s why annual inflation has been so high.”
Consistent monthly readings in the 0.2% range would suggest inflation is under control, he said.
The “penetration” of price increases
A healthy economy experiences a small amount of inflation every year. Federal Reserve officials aim to keep inflation at around 2% annually.
But prices started to rise at an unusually fast rate from early 2021 after years of low inflation.
As the US economy reopened, a supply-demand imbalance fueled inflation, which was initially limited to items like used cars but has since spread and lasted longer than many officials and economists had anticipated.
“That’s the heart of the problem: pervasive inflation,” said Greg McBride, chief financial analyst at Bankrate.
Inflation was a major concern for voters as they neared Tuesday’s midterm elections. An NBC News poll released last weekend found that 81% of respondents were either somewhat dissatisfied or very dissatisfied with the state of the economy — a level not seen since the midterms of 2010.
The typical US household spends $445 more per month on the same items than a year ago, according to an estimate by Moody’s Analytics based on the September CPI report.
Meanwhile, many workers’ wages have not kept pace with inflation, resulting in a loss of purchasing power. According to the BLS, hourly wages have fallen by 2.8% in the last year, adjusted for inflation.
Food, energy and housing are the largest contributors
Large and consistent increases in food, energy and housing prices, despite some recent improvements, have been worrying, McBride said.
They’re necessities that make up a large part of household spending, which is what makes inflation “so problematic” for households, he said.
“You can’t go without food, you can’t go without cooking or heating the house and you need a roof over your head,” McBride said. “These are three categories that continue to drive these high inflation rates.”
Housing represents the largest portion of the average consumer budget, accounting for 34% of household spending in 2021, according to the latest data from the US Department of Labor. Transportation, which includes gasoline, and groceries are 2nd and 3rd at 16% and 12%, respectively.
Any appreciable relief for household coffers is still a long way off.
Chief Financial Analyst at Bankrate
Accommodation prices rose 0.8% in October from September – the biggest monthly increase in this category since August 1990, according to the BLS. The category is up 6.9% over the past year.
The Home Food Index — or food prices — rose 12.4% in October from the same time a year ago. That’s an improvement from 13.5% in August, which was the biggest 12-month increase in more than 40 years since 1979.
The energy category — which includes gasoline, heating oil, natural gas and electricity — rose 17.6% last month from October 2021. That’s down from September’s 19.8%.
“Any meaningful relief of household budgets is still far over the horizon,” McBride said.
Gasoline prices were a major source of irritation for many Americans earlier in the year. Pump prices nationwide have declined from summer highs of more than $5 a gallon but have edged up slightly over the past week; they are currently averaging $3.80 per gallon per AAA.
“We still have a long way to go”
“Core” inflation — a measure that excludes food and energy costs, which can be volatile — is important in predicting future inflation trends, economists said.
The metric gives a sense of how broad-based inflation has become. Core inflation was 6.6% in September, the largest 12-month rise since August 1982. Core inflation had risen 6.3% in October over a year ago; The index rose 0.3% for the month versus 0.6% in September.
Accommodation, which includes rent, was the “dominant factor” in the monthly increase in “core” CPI, according to the BLS. It accounted for 40% of annual core inflation.
The CPI generally lags price momentum in the broad housing market and is likely not an accurate current snapshot of home prices, economists said. Home sales and mortgage volumes have slowed significantly, prompting some to declare that the US is in a housing recession.
Other “notable” increases over the past year are medical care (up 5%), home furnishing and running (8.4%), new vehicles (8.4%) and personal hygiene (6.4%), said the BLS.
Monthly gains came from accommodation, auto insurance, recreation, new vehicles and personal care, according to the BLS. There were also some monthly declines: used cars and trucks, medical supplies, clothing and airfares, he added.
“Price pressures remain evident across a wide range of goods and services,” Federal Reserve Chairman Jerome Powell said during a Nov. 2 news conference.
The central bank has aggressively raised borrowing costs to cool the economy and reduce inflation. Powell signaled that the policy was likely to continue for the foreseeable future.
“I would also say that it is premature to discuss a break [interest-rate increases],” said Powell. “And it’s not something we think about; this isn’t really a conversation.”
“We still have a long way to go.”
Inflation is not just a US phenomenon
Inflation isn’t just a problem in the US, it’s been even worse elsewhere.
For example, consumers in the UK experienced a 10.1% annual price increase in September, hitting a 40-year high in July.
But on the global stage, inflation first showed up in the US, Hunter said. That’s partly because many states are lifting Covid-related restrictions earlier than the rest of the world and federal household support is spurring the economic recovery.
“The US is a leading indicator of what’s happened to inflation in other countries,” Hunter said.
Inflation is a global problem made worse by geopolitical factors such as the ongoing Russian invasion of Ukraine. Pictured: damage in Donetsk, Ukraine, on November 5, 2022 after shelling.
Anadolu Agency | Anadolu Agency | Getty Images
Americans had more disposable income when the economy reopened, the result of federal funding like stimulus checks and pent-up demand from staying at home. Meanwhile, Covid-19 lockdowns have disrupted global supply chains – meaning ample cash has flowed headlong into fewer goods to buy, driving up prices.
These supply chain issues are “only now beginning to be resolved,” Hunter said. But higher labor costs — the result of persistent labor shortages and wages rising at nearly their fastest pace in decades — have also put upward pressure on the cost of services, he said.
The Russian invasion of Ukraine has also fueled a surge in commodity prices – such as crude oil and grain – leading to higher fuel and food costs, Hunter added.
High energy costs have far-reaching effects on other goods, which become more expensive to produce and transport.
“I think this will probably take much of 2023 to unfold if we’re lucky,” McBride said.