US inflation rose faster than expected in the 12 months to September, according to official data, in the final major inflation report before next month's midterm elections.
The annual inflation rate climbed to 3.7%, up from 3.4% in the year to August, driven largely by rising gasoline prices amid disruptions to energy supplies in the Middle East linked to the US-Israel conflict with Iran, reports BBC.
The cost of living has emerged as a major issue in the US midterm elections, putting renewed focus on the pace of price increases and their impact on households.
What is inflation?
Inflation measures how quickly the prices of goods and services rise over time.
For example, if a bottle of milk costs $1 and its price increases to $1.10 after a year, the annual inflation rate for that product is 10%.
In the US, the Bureau of Labor Statistics (BLS) tracks inflation using the consumer price index (CPI). The index measures price changes across a wide range of everyday goods and services, including food, gasoline and medical care, to assess overall price movements in the economy.
The BLS periodically updates the basket of goods and services used in its calculations to reflect changes in consumers' spending patterns and lifestyles.
What causes inflation?
Inflation can rise for several reasons, including stronger demand, limited supply and higher production costs.
When demand for a product exceeds the available supply, sellers may increase prices. The popularity of Labubu dolls in recent years, which pushed up resale prices, is one example.
Rising incomes can also increase consumer spending, potentially putting upward pressure on prices.
Supply disruptions can have a similar effect. When the availability of a product falls but demand remains steady, prices tend to rise. Crude oil is one example, as it is a key raw material used to produce gasoline and diesel.
Before the US-Israel conflict with Iran began, crude oil was trading at just over $70 a barrel. Disruptions to supplies during the conflict pushed prices sharply higher, with oil currently trading above $100 a barrel, according to the supplied BBC report.
What is the current rate of inflation?
US inflation reached 3.7% in the year to September, exceeding expectations as gasoline prices surged.
Fuel prices rose 34.2% over the 12-month period and increased by 9.1% in September alone. The monthly rise accounted for more than half of the overall increase in inflation, according to the BLS.
Energy inflation climbed 20.4% over the year, reflecting higher prices for fuel oil, energy services and electricity. Fuel oil, which is commonly used for home heating, recorded a 74.2% annual increase.
Economists will be watching whether higher energy costs spread to other parts of the economy, particularly food prices, and push inflation further upwards. The US Federal Reserve will also monitor these developments as it considers interest-rate policy.
Food inflation remained relatively subdued, with prices unchanged in September and up 2.5% over the year. Core inflation, which excludes food and energy prices, stood at 2.6%.
Will the inflation hike change Social Security payments?
Following the inflation report, the Social Security Administration announced a 3.6% increase in Social Security benefits for 2027, covering programmes including retirement, survivors and disability insurance.
The adjustment is expected to raise the average monthly retirement benefit by $75.
The cost-of-living adjustment will take effect in January for around 72 million people. Higher payments for the 7.2 million people receiving Supplemental Security Income are due to begin on 31 December.
How have tariffs affected inflation?
Since returning to office for a second term, US President Donald Trump has imposed tariffs on imports from trading partners around the world.
After the Supreme Court struck down most of the additional global tariffs in February, Trump announced a new 10% global tariff to replace them.
Trump has argued that tariffs would increase government revenue, encourage domestic manufacturing and persuade consumers to buy American-made products. However, the additional import taxes have also contributed to higher prices, according to research by the Federal Reserve Bank of New York.
Tariffs are taxes on imported goods that are generally paid by importing businesses. Unless overseas suppliers cut their prices to absorb some of the additional cost, US companies face higher expenses that can be passed on to consumers.
The New York Fed found that foreign exporters reduced their prices only marginally in response to the new tariffs, leaving US businesses to bear nearly 90% of the additional tax burden.
Tariffs can also increase the cost of domestically manufactured products when US producers rely on imported components or raw materials.
The research found that each percentage-point increase in average tariffs led to an almost 0.25% rise in consumer goods prices after one year.
Has inflation been worse lately?
Although the current inflation rate remains above the Federal Reserve's 2% target, it is well below the levels recorded in recent years.
Inflation accelerated during the Covid-19 pandemic as supply-chain disruptions and other pressures pushed up costs.
Energy prices climbed further in early 2022 after Russia launched its full-scale invasion of Ukraine, sending oil prices above $100 a barrel.
Together, these pressures helped drive US inflation to a peak of about 9%.
Can inflation ever go down?
A slowdown in inflation does not necessarily mean prices are falling. It means prices are increasing at a slower pace.
For example, if inflation drops from 5% to 3%, goods and services are generally still becoming more expensive, but at a slower rate than before.
Moderate inflation is widely considered compatible with a healthy economy. The Federal Reserve's 2% target reflects its aim of maintaining relatively stable prices while supporting economic activity.
If inflation falls too low, consumers may postpone purchases in anticipation of further price declines. Weaker demand can then prompt businesses to cut wages or reduce their workforce, potentially slowing economic growth.