Inflation Is Spreading Across the U.S. Economy
The Consumer Price Index (CPI) released Tuesday made it very clear: inflation is getting worse. And the deterioration is considerably more alarming than the headline numbers suggest.
The Consumer Price Index rose 0.4 percent in October, the Department of Labor reported Tuesday. That was a slowdown from September’s 0.6 percent increase, largely because the extraordinary surge in energy prices moderated. Gasoline prices rose just one percent after jumping 9.1 percent in September.
But that improvement in the headline number is misleading. The details of the report make it clear that inflation is spreading across the economy. Food prices are soaring. Core inflation remains stubbornly elevated. Services inflation is accelerating outside housing. And the share of consumer goods and services experiencing rapid price increases has jumped sharply.
The inflation problem is no longer confined to energy. It is spreading.
Inflation Is Becoming More Widespread
One of the most revealing ways to measure inflation is to examine its dispersion—how many different categories of goods and services are experiencing rapid price increases.
Federal Reserve Chairman Kevin Warsh has emphasized this measure as an important gauge of underlying inflation. At Jackson Hole in August, he noted that 54 percent of the components of the Fed’s preferred inflation measure had experienced price increases exceeding three percent over the preceding year, far above the pre-pandemic average of 32 percent.
We performed a similar calculation using the latest Consumer Price Index data, examining 119 detailed categories of goods and services over successive three-month periods. From May through July, 42 percent of those categories experienced price increases exceeding a three percent annualized rate. From August through October, that share jumped to 56.3 percent.
Even more alarming, the number of categories experiencing inflation above five percent doubled, from 26 to 52.
These figures use three-month annualized changes rather than Warsh’s 12-month measure, but the comparison reveals a dramatic deterioration in the breadth of inflation. (The 12-month measures are not available this month because of last year’s government shutdown.)
Deflation Is Getting Narrower
There is another way to see how dramatically the inflation picture has deteriorated. Back in March, falling prices were widespread across the economy. Sixty-one out of 141 detailed consumer price categories were recording falling prices. By October, that number had dwindled to just 38.
To put that in percentage terms, the share of categories experiencing price declines collapsed from 43 percent to 27 percent.
The disinflationary forces that had been restraining consumer prices earlier this year are rapidly disappearing. Fewer prices are falling, and more are rising rapidly.
Core Inflation Is Stuck, and Super-Core Is Worse
Core consumer prices, which exclude food and energy, rose 0.3 percent for the third consecutive month. That translates into an annualized inflation rate of approximately 3.7 percent, far above the Federal Reserve’s two percent objective.
The news was even worse for the so-called super-core measure of services inflation excluding housing. Services prices excluding rent of shelter rose 0.5 percent, accelerating from 0.3 percent in September.
This matters because housing inflation actually moderated in October. Shelter prices rose 0.3 percent, down from 0.4 percent the previous month.
Food inflation also accelerated sharply. Grocery prices rose 0.4 percent after declining slightly in September. Restaurant prices increased 0.5 percent. This is likely a knock-on effect from the high prices of diesel, gasoline, and petroleum based fertilizer.
Waller’s Half-Point Warning
Just hours before the CPI report was released, Federal Reserve Governor Christopher Waller delivered a remarkable speech in London.
Waller said he favored raising interest rates by at least a quarter percentage point in December. But he explicitly raised the possibility of a larger increase if core inflation remained stubbornly elevated.
His benchmark was simple: If October core CPI rose around 0.3 percent or more, the Fed should consider a half-percentage-point increase.
And sure enough, October core CPI rose exactly 0.3 percent.
Waller warned that moving only a quarter point in those circumstances could put the Fed’s inflation-fighting credibility at risk. He also highlighted new Federal Reserve research suggesting that energy shocks may now spread into other consumer prices more powerfully and persistently than they did before the pandemic.
And that’s what the October CPI report is pointing toward. The energy shock from the Iran war is no longer merely a matter of higher gasoline prices. Its effects appear to be spreading throughout the economy, even as the immediate pace of fuel inflation moderates.
What’s more, any hope that the energy shock is going to fade quickly has itself faded. At the end of June, traders were anticipating a return to relatively cheap oil. Following the temporary reopening of the Strait of Hormuz, the futures curve had flattened dramatically. WTI futures for July 2027 delivery were priced at $66.83 a barrel. Now they’re at $77.04. Even for delivery in December of next year, futures are pricing oil above $73 a barrel.
That suggests the hoped-for disinflationary impulse of falling oil will be weaker than anticipated. As a result, inflation is likely to run hotter for longer or require higher interest rates to bring it down.
We’re confident that Chairman Warsh is going to choose the latter path, which means that you should prepare for rates going higher at a faster pace.
