Inflation rose to 3.7% last month in last snapshot of consumer prices before the midterms

By Alicia Wallace, CNN

(CNN) — It’s not just gas.

It’s the car repair, the doctor’s visit, the plane ticket, the computer upgrade, the new clothes.

Inflation rose faster than expected last month, and more broadly than expected, with price pressures extending well beyond the pump, new Bureau of Labor Statistics data showed Wednesday.

The latest Consumer Price Index showed that prices rose 0.6% in September from the month before, bringing the annual rate of inflation to 3.7%, up from 3.4% in August and above economists’ expectations for a 3.6% increase.

A closely watched gauge of underlying inflation also ran hot last month: Core CPI, which excludes volatile food and energy prices, rose 0.3% from August and 2.6% from a year earlier (economists were expecting increases of 0.2% and 2.5%, respectively).

Inflation is moving uncomfortably higher, further eroding Americans’ pay gains, compounding affordability concerns, and keeping the economy – and the Trump administration’s handling of it – in focus for voters in advance of the midterm elections.

“We’re in a world now of inflation at 3.7% and wage gains for the typical American at 3%; that’s a big gap,” said Heather Long, chief economist for Navy Federal Credit Union. “The inflation pressures are in quite a few areas, and it’s tricky to cut back. The anger about the economy that many Americans feel has justification.”

‘A greater desire by businesses to pass on higher costs’

The Iran war’s energy shock continues to ripple through the economy. Gas prices, which rose 9.1% in September, accounted for more than half of the monthly increase, according to Wednesday’s report.

“You see the energy crisis causing used car prices to rise, and airfare prices to rise, and recreation costs to rise; and on top of that, you’ve got medical care and apparel also rising,” Long said. “So, it’s this more broad-based problem than just a gas price spike.”

The price increases across various categories outside of food and energy were the most concerning aspects of Wednesday’s report, said Gregory Daco, chief economist at EY-Parthenon.

Core goods prices rose at the fastest rate since January 2025, he said. And some categories’ monthly price increases stretched back even further: The 1.1% increase in men’s boy’s apparel prices was the highest since April 2024, and the 4.2% hike in toy prices was the highest on record, BLS data shows.

“They don’t necessarily appear to be tariff-driven,” he said. “What appears to be driving some of these core price pressures is perhaps a greater desire by businesses to pass on higher costs.”

Wednesday’s report also continued to show the fingerprints of massive AI-related infrastructure spending. Computer software and hardware prices are rising at their fastest-ever annual rates.

Housing-related inflation, which is captured in the weighty “shelter” category, rose 0.4% from August, the fastest monthly rate in five months, BLS data shows.

Shelter-related price hikes have been on a disinflationary path for more than three years; however, economists have questioned how much further those prices could slow as low inventory and high interest rates weigh on the housing industry.

It wasn’t just shelter: Services-related inflation was pushed up by higher prices for hotel rooms, hospital visits, nursing home care, rental cars, tuition, sporting events and intra-city transportation, Daco said.

Those increases are partly demand-driven (continued spending from a segment of consumers more resilient to price shifts) as well as reflective of higher diesel costs, he said.

Bracing for more rate hikes and erosion in consumer spending

For American consumers, there’s really no easy way to escape higher prices, said Navy Federal Credit Union’s Long.

“People are having to skimp on something; and for a lot of Americans, that’s the grocery store … they trade down to the store brands, eat a little less meat in order to have enough money to pay all their bills,” she said.

Grocery prices were a silver lining in September’s CPI report as they ticked down by 0.1% from August. To what extent that lasts remains to be seen: Economists expect that sharply higher diesel prices could push up food costs.

Inflation is expected to remain elevated through the end of the year, further eating away at Americans’ ability to spend, said EY-Parthenon’s Daco.

“What we are living through is really an erosion phenomenon, an income erosion phenomenon,” he said.

Wednesday’s data puts the Federal Reserve further from its 2% inflation target (measured by the Personal Consumption Expenditures price index) and could prompt policymakers to hike interest rates again if price pressures persist.

The broadening of price pressures beyond the pump “bolsters the case for additional rate hikes,” Jeff Schulze, head investment strategist for Franklin Templeton Institute, wrote in a note Wednesday, but noted that recent commentary from Fed officials suggests the bar for such a move could be high when policymakers meet later this month to decide on borrowing costs.

Stocks fell and bond yields surged after the report reinforced traders’ expectations that the Fed will keep interest rates higher for longer to tamp down inflation. The 10-year Treasury yield jumped eight basis points to 5.3%.

Odds for a Fed rate hike in October rose to 49% Wednesday morning, up from 22% one day ago, according to CME FedWatch. Traders widely expect the Fed to raise rates at least once before year-end.

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CNN’s John Towfighi contributed reporting.