The inflation rate increased in September on the back of higher gasoline and energy prices amid the Iran war, further squeezing households' budgets and perhaps putting pressure on the Federal Reserve to raise interest rates, economists said.
The consumer price index rose by 3.7% in September from 12 months earlier, the Bureau of Labor Statistics reported Wednesday. That's up from a 3.4% annual pace in August.
Economists may be more concerned about the reading for "core" CPI, a measure that strips out food and energy prices, which can be volatile, and is often used to examine underlying inflation dynamics in the U.S. economy. That reading jumped to 2.6% in September from 2.4% in August.
"The overall report shows inflation is uncomfortably strong," said Mark Zandi, chief economist at Moody's.
"The war's fingerprints are all over the report," he said. "It's driving a lot of the inflationary pickup."
'Frustration' over cost of living
The inflation reading comes less than a month before the upcoming midterm elections, in which affordability is widely seen as a primary issue for voters.
In addition to rising prices for goods and services, Treasury bond yields have increased sharply in recent months, putting upward pressure on rates for mortgages, auto loans and other types of consumer debt.
The Fed — the U.S. central bank, which uses interest-rate policy as a lever to control the trajectory of inflation — may choose to increase its benchmark interest rate at upcoming policy meetings to rein in persistently high inflation, economists said. That benchmark rate has a direct impact on credit card rates and influences other borrowing costs, too.
The central bank aims for a long-term annual inflation target around 2%. Inflation has been above that target for more than five years.
Wednesday's CPI report "gives more support to the argument that the Fed is going to continue raising rates," Zandi said.
Inflation pressures will likely push the Fed to hike rates between now and spring 2027, according to a Wells Fargo Investment Institute analysis published Tuesday.
Barometers of consumer sentiment have plunged to multiyear lows amid rising prices. The University of Michigan's index of consumer sentiment sunk to its second-lowest reading on record in September.
"Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year," University of Michigan Surveys of Consumers Director Joanne Hsu said of the data.
The Social Security Administration on Wednesday announced a 3.6% cost-of-living adjustment for benefits in 2027. The Social Security COLA calculation is based on a subset of the consumer price index, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
However, a recent AARP survey found 76% of respondents said a 3.5% COLA would not be enough.
Impact of the Iran war, oil prices on inflation
The Iran war — which began at the end of February, when the U.S. and Israel launched strikes on Iran — has pushed up oil prices.
In turn, prices for fuels like gasoline, diesel and jet fuel, which are refined from crude oil, have also increased, generating higher costs across the U.S. economy, economists said.
Inflation is an "oil story," said Michael Reid, head of U.S. economics at the Royal Bank of Canada. "That'll be the story for a few more months."
The war severely crimped oil flowing through the Strait of Hormuz, a key transit artery in the Middle East through which a large volume of the global oil supply passes. The conflict has damaged the region's refining infrastructure and restricted supplies of other materials like fertilizer, putting upward pressure on global food prices.
Russia's war in Ukraine has also contributed to higher diesel prices, largely because Kyiv has bombed Russian refineries, economists said.
"Crude oil is moving through the Strait of Hormuz but remains below its pre-war pace. Even after key waterways fully reopen, lost refining capacity and distribution problems may delay lower energy prices until mid-2027," according to the Wells Fargo Investment Institute analysis.
Gasoline prices rose by 9.1% in September alone, accounting for more than half of the monthly increase in the consumer price index, the Bureau of Labor Statistics reported Wednesday. Gas prices are up 34% over the last year, it said.
The average nationwide price at the pump was $4.33 per gallon on Wednesday, up 45% from $2.98 per gallon on Feb. 27, right before the Iran war began, according to AAA data.
While higher gasoline prices have pinched drivers, high diesel prices are pressuring consumers more broadly.
Diesel is a fuel used by trucks, trains and ships that transport goods to stores. It has many uses beyond transportation, including farming and manufacturing, as well as residential and industrial heating.
Average diesel prices were $6.30 per gallon on Wednesday, up about 68% from $3.76 per gallon before the Iran war, according to AAA data.
"Somebody has to pay for that," Reid said.
But higher fuel prices don't trickle through to consumers quickly — it's a process that may take a few months, he said.
As the winter holiday shopping season approaches, when retailers typically offer enticing discounts to draw consumers, Reid said he'll be looking to see whether businesses offer smaller discounts than usual, or none at all.
Airline fares are up 22% over the past year, according to CPI data, largely reflecting higher jet fuel prices, economists said.
But travel prices are also up because of strong consumer demand, economists said.
For example, hotel and motel prices are up more than 4% over the past year, too, according to CPI data.
"I think a lot of that goes to high-end demand [for travel]," Zandi said. "A lot of wealthy Americans are traveling more because of the runup in stock prices and their net worth. That's powering a lot of spending."
Other sources of inflation
The Iran war and energy prices aren't the only sources of inflationary pressure, economists said.
"It's tariffs on top of that, adding slightly and layering on energy prices," Reid said.
The build-out of data centers supporting artificial intelligence is also a contributor, economists said.
That's because it has increased demand for — and scarcity of — the computer chips used in AI data centers. Manufacturers use those chips in all types of consumer electronics, including in laptops, video game consoles and cars, economists said.
For example, in June, Apple announced higher prices for MacBooks and iPads, citing surging memory and storage costs. Microsoft said shortly afterward that it's increasing Xbox game console prices for a similar reason.
One bright spot in the inflation report, Zandi said: Grocery prices fell over the month by 0.1%, despite higher diesel prices.
Beef prices fell 1% during the month, according to CPI data, which Zandi said was at least partly attributable to a temporary reprieve on beef tariffs that President Donald Trump announced in August.
