Inflation, worker pay are rising in U.S. at fastest pace in decades

Annual inflation is climbing at the fastest pace in three decades in the United States, keeping pressure on the Federal Reserve and White House as they try to calibrate policy during a tumultuous period marked by widespread supply shortages, solid consumer demand and quickly rising wages.

Prices climbed 4.4% in the year through September, according to the Personal Consumption Expenditures price index data released Friday. That beats out recent months to become the fastest pace of increase since 1991.

Prices climbed 0.3% from August to September, in line with what economists expected and slower than rapid numbers posted earlier in the summer. Policymakers may take that as a sign that inflation was moderating coming into the fall, but the fact that the Fed's preferred inflation gauge remains elevated on an annual basis will keep Washington and Wall Street keenly focused on inflation numbers in the weeks and months ahead.

The new data come before a Fed meeting next week at which the central bank will provide an update on its latest thinking about price increases. It is also widely expected to announce its plan to begin pulling back some pandemic-era support for the economy.

As policymakers parse the latest figures, rising wages are likely to add to their nervousness. Pay and benefits picked up rapidly for working Americans in the three months through September, separate data released Friday showed, and especially for employees in service occupations. Surging pay is good news for employees but could spur employers to continue hiking prices as they try to cover rising labor costs.

The current pace of inflation has become an uncomfortable political problem for President Joe Biden and has created a delicate balancing act for the Fed, which is still trying to coax the labor market back to full strength. Employers may be struggling to fill jobs today and raising pay to compete for workers, but that seemingly tight labor market belies a more complicated reality. Many would-be employees remain on the labor market's sidelines, likely because of concerns about the virus and child care issues, and policymakers want to make sure that the economy is strong and jobs are available when they are ready to return.

"The big question for the Fed is: How much of this is really transitory, and how much of this is here to stay?" said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities.

Whether things get back to normal in time to keep longer-run inflation in check is perhaps the most pressing question facing U.S. economic officials as the economy grinds through a halting pandemic reopening.

Fed Chair Jerome Powell has increasingly acknowledged that inflation is lasting longer than central bankers had expected. Fed officials believe inflation will fade as supply chain snarls unravel and consumer demand for goods cools, but it remains unclear when that will happen. Treasury Secretary Janet Yellen has predicted that rapid price jumps will cool by later next year.

The inflation data released Friday confirm what more timely measures like the Consumer Price Index had already shown: For now, price gains remain unusually brisk. Supply chains are struggling to keep up with strong demand, thanks to virus-tied factory shutdowns, clogged ports and a shortage of transit workers, among other factors. It is hard to buy a kitchen table or a used car, and the prices of many goods have jumped sharply.

Demand has yet to drastically fade. Personal spending continued at a solid pace in September, data released Friday showed, climbing 0.6% from August — slower than the prior month but in line with what economists had expected.

Spending could moderate in the months ahead as federal stimulus dries up and households deplete savings that they built up during the pandemic. A measure of incomes that includes benefit payments decreased 1% last month as more generous unemployment payments expired and other pandemic relief programs slowed or stopped payouts. The personal savings rate also fell to 7.5%, down sharply from recent months and roughly where it stood before the onset of the pandemic.

Americans are earning more from work, data released Friday showed. A measure of employment costs that traces wages and benefits climbed 1.3% in the third quarter, more than the 0.9% economists had expected and the fastest pace in data since the series started in 1996.

On an annual basis, the Employment Cost Index climbed 3.7%, the fastest pace since 2004. Wage gains are especially rapid in service industries, which have been struggling to lure back workers as they reopen from pandemic lockdowns.

Strong wage gains could help to sustain demand and may keep inflation higher than normal, especially as companies try to remain profitable even as they pay more for labor. The Fed is closely watching wages and measures of inflation expectations, which have risen in recent weeks, as it tries to assess whether price gains might spiral out of control.

"The risk is that ongoing high inflation will begin to lead price- and wage-setters to expect unduly high rates of inflation in the future," Powell said last week. And if inflation seemed likely to stay high, "we would certainly use our tools to preserve price stability, while also taking into account the implications of our maximum employment goal."

The Fed is responding to the complicated moment by putting itself in a position to be nimble.

That would leave the Fed in a position to raise its policy interest rate, its more traditional and arguably more powerful tool, should it need to do so to tamp down price increases. That rate has been set near zero since March 2020.

"What they're doing is a form of risk management at the moment," Goldberg said. "They're really walking a tightrope here."

When the Fed raises interest rates, it makes it more expensive to borrow to buy houses, cars and washing machines. As demand cools, supply catches up, and price gains moderate or even reverse, reducing inflation.

But the downside is that slower consumption and economic growth also lead to less business expansion and hiring. Slowing the job market is an unattractive prospect at a moment when millions of people remain out of work following lockdowns early in the pandemic and with concerns lingering about health and child care.

Plus, if the current burst in prices does prove temporary, a strong Fed reaction could prove premature — leaving the economy unnecessarily weak and inflation too low in the long term.

"Americans have not seen inflation like we have experienced recently in a long time," Yellen acknowledged on CNN's "State of the Union" on Oct. 24. "As we get back to normal, expect that to end."