WASHINGTON — New evidence this week of high inflation in the United States was unpleasant news for the Federal Reserve, not to mention consumers: Rising prices could spread beyond one-off shocks from tariffs and high gasoline prices to the economy as a whole, meaning mortgages, credit cards and other forms of borrowing are likely to become increasingly costly.
Tuesday’s Consumer Price Index report showed widespread rising costs across a range of goods and services, some with little connection to pricier oil and gas or a surge in investment in artificial intelligence data centers, another factor blamed for worsening inflation. And Fed officials are increasingly concerned that the rise in oil prices resulting from the Iran war could last longer than previously thought.
A key question debated by Fed policymakers for months is whether inflation would slow on its own if the war in Iran ended and oil prices fell and the impact of tariffs faded. But government data suggests inflation rose to 4% in October from a year ago, up from 3.7% in September, even as gasoline prices stabilized.
The potential consequences of the new inflation data were immediately apparent. Two Fed officials suggested Tuesday that the central bank may need to raise its key interest rate more quickly to bring inflation under control. Bigger or faster hikes from the Fed would mean that buying a home or car, or paying off a credit card, would become a more difficult hill to climb, when millions of Americans are already struggling to make ends meet.
Lorie Logan, president of the Federal Reserve Bank of Dallas and a voting member of the Fed’s rate-setting committee, said Tuesday that price increases remained high for services such as “doctor visits, child care, restaurant meals and hotel stays.”
“Prices for these services are not particularly sensitive to tariffs, conflicts in the Middle East or growing demand for computer chips,” she added. “While I expect inflation to moderate as price pressures dissipate in the energy and manufactured goods sectors, the broader inflationary trend is more likely to persist.”
Logan said Tuesday she supports two additional quarter-point rate hikes. Although she has made similar statements before, Logan added that the Fed could “move more quickly this winter” than it “has done so far this fall,” signaling that it could sustain two consecutive rate hikes, a faster pace than the Fed’s current approach.
At its last meeting in late October, the central bank kept rates unchanged at around 3.9%. Chairman Kevin Warsh declined to say whether further increases were likely. The central bank raised rates at its September meeting.
Wall Street investors now see a 90% chance the Fed will raise borrowing costs at its next meeting on Dec. 8-9, according to futures prices tracked by CME Fedwatch. Expectations for a second hike at the January meeting tripled between Monday and Tuesday, to more than 64%.
Some Fed officials had expressed optimism over the summer that once the shocks from tariffs and high gas prices had passed, inflation would decline without Fed intervention.
But Anna Paulson, president of the Philadelphia Fed, cast doubt on that view in a speech Tuesday evening.
“Underlying inflation is above target and has not fallen,” she said. “This tells me that high inflation is not just due to factors that will go away on their own.” Nonetheless, she also said she only supports incremental rate increases.
Tuesday’s inflation report showed prices rising in many areas with little to do with energy costs or AI, including video streaming services, beef and auto insurance.
But increased investment in data centers has driven up the cost of computer chips, power generation equipment and copper, among other components, with little sign of easing. Smartphone prices jumped 1.4% between September and October, the government said, the biggest increase on record.
Computer prices jumped 0.5% last month and television prices jumped 3.3%, reversing the more typical trend of these prices falling with technological innovation.
The Fed’s focus on the inflation gap is not entirely new. In late August, President Kevin Warsh called attention to data showing that most goods and services were experiencing notable price increases. His speech at the Fed’s Jackson Hole symposium indicated that the central bank would raise rates the following month for the first time in three years.
Since then, inflationary trends have hardly improved. On Tuesday, even before October inflation figures were released, Fed Governor Christopher Waller pointed out in a speech in London that 70% of service prices rose 3% or more in September from a year earlier.
Waller also said that if monthly core inflation — which excludes food and energy prices — hits 0.3% or higher in October, the Fed should consider raising interest rates by half a point next month, or double the usual hike.
It turned out that this is exactly the increase in core inflation.
Even though oil prices have fallen steadily since the start of the month as President Donald Trump suggested fighting could end in the Middle East, Waller noted that U.S. energy costs could remain high.
The cost of insuring tankers passing through the Strait of Hormuz and taking other measures to avoid attacks has pushed oil prices up $20 to $30 a barrel, Waller said. Diesel fuel prices are also expected to remain high due to the lack of refining capacity, some of which was destroyed in the war in Ukraine, he added.
And even though the price of a barrel of oil has fallen more than 5% in the last 30 days, it still costs about $30 more than this time last year.
In a speech to the Council on Foreign Relations on Tuesday, Fed Governor Michelle Bowman suggested that inflation could worsen, saying that “price pressures were concentrated in a few categories, but the latest data suggests that these pressures could be broadening.”
The key takeaways from this article were generated with the help of large language models and reviewed by our editorial team. The article itself is solely written by humans.
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