The core Consumer Price Index (CPI), which excludes food and energy, rose to a multi-decade high in September, disappointing both investors and policy makers. The CPI is one, but not the only metric for inflation.

September headline inflation eased slightly to 8.2% year-over year from 8.3% in August. Energy commodity prices outright declined for the last three months, offsetting the accelerating price increases in other areas such as food and rent. Core inflation, which excludes food and energy, rose 6.6% from a year ago, the highest rate since 1982. The nagging pressure on core inflation will likely put pressure on the Federal Reserve (Fed) to stay aggressive in its fight.

Inflation is Unevenly Distributed

Not all categories experienced price increases. Gasoline and fuel prices fell for the third consecutive month and used car prices fell six out of the last eight months.

But other categories show persistent and potentially entrenched inflation pressures. Shelter costs were the largest contributor to headline inflation, adding 2.2 percentage points in September. Rent prices rose 18 out of the past 19 months, creating acute pain for those who didn’t participate in the recent home-buying surge.

Inflation continues to be driven by services such as medical care, insurance, and housing in contrast to the decelerating inflation in goods, especially durable goods as shown in the chart below.

View enlarged chart.

Impacts on Consumers Are Mixed

Higher prices and slow wage growth will likely put pressure on consumers as purchasing power declines. We expect to see growing demand for credit and a drawdown in savings to support spending habits. Prices at the pump fell during the first half of September but reversed course and continued to increase into October, adding to the risk that the October CPI report will also disappoint.

Rising food and rent costs are a growing concern. These pressures are especially hurting lower income households where food and rent are a larger share of total spending.

Rising Rents Continue

Rents will likely continue to rise as the housing market rebalances after the post-COVID boom. Recent pricing trends for rent of primary residence is alarming. Rent prices are up 7.2% from a year ago, the fastest rate since the early 1980s. The massive reshuffling in the housing market explains most of the rise in rental costs. During the recent period of unusually low mortgage rates, housing demand skyrocketed and home price appreciation reached new levels. High housing costs pushed many homes out of reach for would-be millennial buyers and for first-time buyers with no pre-existing home equity. High demand for homes and low supply created insurmountable hurdles and pushed many to be renters instead of home buyers so it may be a while before rent prices cool.


Headline inflation is likely past its peak, but the Fed still has work to do. The Fed will likely increase rates again by 0.75% in November as core inflation is not cooling as fast as expected. A big risk for the Fed is inflation becoming entrenched in some sectors such as services as inflation cools in other sectors. Another risk is the unknown impacts of a strong dollar in the international currency markets. The US dollar will likely strengthen as the Fed keeps tightening in this uneven inflationary environment.

As import prices and producer prices ease, the inflation outlook should improve. As policy makers have publically indicated, inflation is the primary concern and for now, the Fed is willing to sacrifice economic growth in the near term to get inflation back to the long-run rate of 2%. The path to a soft landing for the Fed continues to narrow. While avoiding a deep recession remains possible if the labor market holds up, the odds of recession continue to rise as the inflation fight gets more challenging.