No Respite for the Fed on High Inflation

If the Federal Reserve was hoping for some sign that inflation is subsiding, it was cruelly disabused by the latest figures for consumer prices. The headline rate fell back slightly in September, from 8.3% to 8.2%, but the more telling measure of core inflation, which excludes the cost of food and energy, reached the highest rate in 40 years, rising from 6.3% to 6.6%. The message was clear: Far from relaxing its recent pace of monetary tightening, the Fed might have to raise interest rates faster and further than expected.

The central bank’s dilemma is acute. Officials acknowledge that it was too slow to start raising interest rates as the economy bounced back from its pandemic-induced slump, and has had to play catchup in recent months as a result. Yet prices are still rising, with no turning point in sight. The Fed’s plan for future interest rates might now need to ratchet higher — further narrowing the path between persistent inflation (if it does too little) and outright recession (if it goes too far).

Last week’s data offers little reassurance that things will soon improve. The headline rate has probably peaked, but high underlying inflation is getting entrenched and spreading more widely. Although energy prices fell in September, rents were up and the price of services rose especially fast, suggesting that inflation in goods might be pushing wages higher. Gasoline prices are moving up again too. In their most recent projection of interest rates — the so-called dot plot — Fed officials indicated that the pace of interest-rate increases would slow after an expected rise in the policy rate from 3.25% to 4% next month. That schedule no longer looks plausible.