Prices Are Outrunning Paychecks

September inflation climbed to 3.7% on surging gas prices, and workers' pay has not kept pace since March.

New government data released Wednesday shows the cost of living climbing faster again. The Consumer Price Index rose 0.6% in September and 3.7% from a year earlier, up from 3.4% in August and the highest annual reading since May. At the start of the year, inflation stood at 2.4%. The report is the last major inflation reading before the November 3 midterm elections, in which polls consistently show the cost of living ranking among voters' top concerns.

The Pump Sets the Pace

The Bureau of Labor Statistics said gasoline prices rose 9.1% in September, accounting for more than half of the month's overall increase, with the national average at about $4.33 a gallon on Wednesday, according to AAA. Economists tie the surge to the energy disruptions from the war with Iran. Stripping out food and energy, "core" inflation rose 0.3% for the month and 2.6% over the year, up from 2.4% in August, a sign that the pressure is not limited to the pump. Moody's chief economist Mark Zandi called the report uncomfortably strong. The Federal Reserve raised interest rates in mid-September for the first time in three years, and after Wednesday's data, NBC News reported that traders see better-than-even odds of another hike at the Fed's October 28 meeting.

For households, the more telling number came in a separate release the same day. Average hourly earnings rose just 0.1% in September while prices rose 0.6%, which means real average hourly earnings, wages adjusted for inflation, fell 0.5% for the month. Annual wage growth is running at about 3%, below the 3.7% inflation rate, and paychecks have not grown faster than prices since March. Paychecks are still growing in dollar terms, but they buy less than they did.

A gas station price sign glowing at dusk with a long line of cars at the pumps

Gasoline prices rose 9.1% in September, driving more than half of the month's increase in consumer prices.

Energy shocks have a long history of reshaping the economy, most famously in 1973, when an oil embargo sent prices soaring and helped usher in years of high inflation. Today's numbers are far below the 9.1% peak reached in 2022, and this year's high so far was 4.2% in May, but the direction is what has economists watching. The next inflation report arrives on November 10, a week after Election Day. Between now and then, the Fed's October decision will show how central bankers weigh a stubborn price level against a slowing job market and an energy shock they cannot control.