Inflation Continues to Challenge U.S. Economy
An official comparison with October 2025 was missing because of the government shutdown, but our calculations showed prices rose around 4 percent.
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U.S. inflation remained elevated last month, underscoring the need for the Federal Reserve to raise interest rates again this year.
Overall prices rose 0.4 percent in October after a 0.6 percent jump in September, according to the latest Consumer Price Index report from the Bureau of Labor Statistics. “Core” prices, which strip out volatile food and energy items, rose 0.3 percent.
The agency on Tuesday did not release year-over-year figures for October because it was unable to collect data during last year’s government shutdown. According to calculations by The New York Times, overall prices were around 4 percent higher compared with the same time last year, up from 3.7 percent in September. Over the same period, core prices rose about 2.8 percent.
One of the biggest drivers of inflation in October was food. Prices rose 0.5 percent last month and about 3 percent since the same time last year. That likely reflects a surge in energy prices, especially diesel prices, which have exploded costs for farmers.
Energy prices overall rose modestly in October and were up 0.7 percent for the month after a 5.2 percent jump in September. Gasoline prices rose 1 percent, significantly slower than the 9.1 percent increase during the previous period. Electricity prices rose nearly 1 percent.
October’s C.P.I. report was the last before the Fed meets for its final gathering of the year on Dec. 8-9. Policymakers have signaled that they will raise rates next month as they seek to stamp out price pressures that have pushed inflation further from their goal. While the Fed tracks C.P.I., it officially targets 2 percent inflation, as measured by the Personal Consumption Expenditures index. That level has been overshot for nearly six years.
Fed officials also watch the price of services as an indicator of the underlying pace of inflation. Specifically, they have been looking at core services excluding housing, a measure sometimes referred to as “supercore.” Those prices rose 0.4 percent in October, and have risen at an annual rate of nearly 5.5 percent over the past three months.
On Tuesday, Christopher J. Waller, a Fed governor, raised the prospects of a larger-than-usual half-point interest rate increase at the bank’s meeting in December if inflation did not show signs of moderating.
In remarks delivered at a Bank of England event, Mr. Waller said a quarter-point increase would suffice if price pressures improved. But if “core” inflation rose 0.3 percent or more, as October’s data showed, Mr. Waller warned that the Fed risked its credibility by not moving more aggressively. “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,” he said.
Two-year Treasury yields, which are sensitive to changes in interest rate expectations, were up over 0.1 percentage points on Tuesday to 4.67 percent as investors raised wagers that the Fed would raise rates more over time to quell inflation. The labor market remains in solid shape, as October’s report released on Friday showed, affirming that the Fed can focus solely on its inflation problem.
October marked the seventh straight month in which price increases outpaced wage growth on a 12-month basis. Average hourly earnings were up 3.1 percent in October from a year earlier, well below the roughly 4 percent annual inflation pace.
U.S. stocks opened in the red, with the S&P 500 down 0.7 percent when markets began trading. The tech-heavy Nasdaq index was down 1 percent. Those drops follow a blockbuster day for stocks yesterday, when both indexes posted their best single-day rally since April.
Kevin Hassett, the director of the White House National Economic Council, acknowledged today’s inflation report was “disappointing,” pointing to the impact of rising energy prices. (He was asked no follow-up question about the report during the brief appearance on Fox Business.)
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Although investors are now leaning definitively toward a rate hike in December, there doesn’t seem to be much worry about a supersized half-point increase, as Fed Governor Waller hinted might be necessary. “An outsized move should require evidence that inflation is accelerating decisively, expectations are becoming unanchored or the economy is overheating,” said Seema Shah, chief global strategist for Principal Asset Management, in a note. “We are not there yet.”
A note about that 4 percent figure: It may be slightly exaggerated. Because of the missing October data, the Bureau of Labor Statistics had to make some assumptions when it calculated the Consumer Price Index for November 2025. The approach it took (essentially carrying over most prices from September to October) artificially depressed the November figure, which makes the increase in prices since then look larger than it really was. The effect is modest, though — there’s no question that inflation has picked up meaningfully in recent months.
Robert Sockin, the chief economist at PGIM, an asset management firm, tells me, “over the last few quarters inflation has shown little to no progress toward the Fed’s target and may even be worsening. Pressures remain broad-based across categories.”
He says his firm now expects the Fed to begin debating whether more aggressive policy action may be merited, saying that “signaling gradualism in an environment of hot and worsening inflation” would be a mistake.
The high costs in various corners of the healthcare system in America played a large role in voter dissatisfaction this fall. And we see some evidence of it in this inflation report. Prices for medical care commodities, which include prescription and over-the-counter drugs as well as medical equipment and supplies, were running hot this month, increasing by half a percentage point in October alone. (That comes after some more hopeful signs of cooling earlier in the year.)
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The buildout of data centers has been a driving force behind America’s economic growth this year, but it’s also pushing up prices of some electronics and services that compete for the same chips. Prices for computers and related items are up 11.8 percent since this time last year, and software prices have climbed nearly 26 percent.
The cost of shelter, which drives more than a third of the overall index, has largely returned to its long-term average pace of price increases after a huge spike during the pandemic. It increased 0.3 percent over the month, down slightly from September’s pace, and is up 3.4 percent since this time a year ago according to our estimates. Hotels were the worst part of that category, rising 0.6 percent over the month; those prices have been growing at a quicker than usual clip all year.
Lettuce is apparently back on the menu after summer jitters brought on by the cyclospora outbreak tanked the price of leafy greens. Lettuce prices increased 7.9 percent from last month and are up about 9.2 percent compared with last year.
“All of this matters for markets, because a more patient Fed would be easier for stock bulls to navigate, while a more aggressive Fed could prove to be too big of a headwind for the market to overcome next year,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
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High housing costs are keeping potential buyers on the sidelines, and the hotter-than-expected inflation data is likely to keep mortgage rates elevated, said Jeff Ostrowski, a housing market analyst at Bankrate, a consumer financial services company. “It’s hard to believe that just eight months ago, mortgage rates were flirting with 6 percent,” he said. “Now, they’re unlikely to go below 7 percent.” He added, “That means the housing market is likely to keep stumbling along, with low levels of home sales.”
Another area where higher oil prices are squeezing consumers is airfares. Prices for airline tickets were up 0.4 percent from last month and a hefty 27.8 percent year-over-year, according to our estimates. That is making holiday travel more expensive than it was last year.
When inflation first picked up last spring, the optimistic take among economists was that the increase was mostly an energy story, and that there wasn’t much sign that higher prices were filtering through the economy. That has become significantly less true in recent months. Consumer prices, excluding energy, have risen at a 3.6 percent annual rate over the past three months.
Be careful with your dishes this holiday season. The price of dishes and flatware was up 1.3 percent from last month and about 12 percent year-over-year, according to our estimates.
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In his remarks in London, Waller said he expected energy prices to “remain elevated,” even as oil dips below $90 a barrel this morning. He pointed to high shipping costs and limited refining capacity. “As a consequence, elevated prices for diesel in the United States are not expected to moderate as readily as crude oil prices would in a more peaceful Middle East,” Waller said.
Though the price of food was broadly up in October, egg prices were up just 0.6 percent from last month. And they were down about 15.7 percent year-over-year, according to our estimates. Egg prices have become a political talking point.
Some good news for morning caffeinators: The surge in coffee prices last year appears to have moderated. The price of coffee was down -3.6 percent from last month, and up only a modest 2.3 percent from last year.
Despite the uncertainty around the year-over-year number, it’s safe to say that this was the seventh straight month in which price increases outpaced wage growth on a 12-month basis. Average hourly earnings were up 3.1 percent in October from a year earlier, while prices were up about 4 percent.
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Waller’s comments just ahead of October’s report complicates things for the Fed in the sense that it introduced the idea of a big, half-point increase to rates in December if price pressures did not ease as expected. That is exactly what October’s report showed.
Another category that is heavily exposed to tariffs is toys, which were up about 8.9 percent year-over-year. Those price increases could sting going into the holiday season.
This report will intensify the debate around whether the Fed has to move more aggressively in raising rates to tame inflation. Officials have so far adopted a gradual approach to lifting borrowing costs, making a move in September and then forgoing one in October. The Fed is widely expected to again raise rates in December.
Given all the noise around tariffs and energy prices, some economists at the Fed and elsewhere have been focusing on the price of services as an indicator of the underlying pace of inflation. Specifically, they have been looking at core services excluding housing, a measure sometimes referred to as “supercore.” Today’s data didn’t provide any good news on that front: Supercore prices rose 0.4 percent in October, and have risen at an annual rate of nearly 5.5 percent over the past three months.
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