Christopher Rugaber, Associated Press
WASHINGTON (AP) — High gas prices are contributing to inflation and taking a larger share of Americans' spending, yet consumers are still spending, supporting the economy for the time being.
Economic data released on Thursday indicated that inflation accelerated last month as rising oil and gas prices began to affect other sectors, including shipping and warehousing, before these costs reach consumers.
Wholesale food prices increased, which may lead to higher grocery costs in the coming months.
At the same time, consumer spending increased, according to the data released Thursday. While much of this increase is attributed to higher prices, consumer resilience is contributing to solid economic growth in the U.S.
Despite some layoffs, workers are experiencing a notable level of job security, which may encourage spending even as surveys indicate a generally pessimistic economic outlook among many Americans.
Jim Baird, chief investment officer at Plante Moran Financial Advisers, stated, "Consumers may have gritted their teeth and looked through higher gas prices. They're not happy, but they're still spending."
A report on wholesale prices helps clarify the economic concerns: The government's producer price index, which measures costs before they reach consumers, rose 6.3% in September compared to a year earlier, marking the largest increase in nearly four years. Monthly prices surged 1.3% from August to September, driven by a 20% rise in gas prices.
Higher diesel prices have increased shipping costs, as long-haul trucks and freight trains depend on this fuel. This rise in transportation costs may have contributed to a 1.2% increase in food prices from August to September, the largest monthly gain since February. The wholesale price report followed the latest consumer price figures released on Wednesday, which showed inflation rising to 3.7% in September, significantly above the Federal Reserve's target of 2%.
Carl Weinberg, chief economist at High Frequency Economics, noted, "The jolt to transportation prices affects every good in the economy, since inputs to manufacturing move to factories and goods at all stages of production move from producer to wholesaler to retailer by truck, train or rail. This is how increases in energy prices 'bleed through' to prices of core goods."
Farmers also rely on diesel for their equipment, which could further increase food prices. Diesel prices averaged $6.32 per gallon nationwide on Thursday, up from $3.66 a year ago, according to AAA.
Despite these cost pressures, retail sales rose by 0.8% from August, exceeding economists' forecasts. This increase was fueled by a 6.4% rise in spending at gas stations, while spending also grew by 1.1% at restaurants and bars.
Excluding gas, retail sales only increased by 0.2% last month, with much of that increase also reflecting higher prices.
Economists suggest that as long as unemployment remains low and Americans continue to work, consumer spending is likely to stay strong. While hiring has been slow, layoffs are also at a historically low level.
Another report on Thursday indicated that the number of individuals seeking unemployment benefits remained below 200,000 last week, a historically low figure. Applications for unemployment aid serve as a proxy for layoffs.
Kathy Bostjancic, chief economist at Nationwide, stated in an email, "If the unemployment rate remains low, meaning consumers have a job, they will continue to spend, even if more cautiously and leaning increasingly on savings and credit."
However, many economists express concern that persistent inflation will gradually diminish Americans' spending power and negatively impact the economy. Weekly paychecks, adjusted for inflation, actually decreased in September compared to a year ago for the first time since May.
Additionally, hiring in September slowed to a disappointing 29,000 jobs from a revised 133,000 in August, according to the Labor Department. The unemployment rate increased slightly to 4.2% from the previous month, which remains low, but economists had anticipated September payrolls to be around 90,000.
The ongoing high inflation also suggests that the Federal Reserve may raise its key interest rate in the coming months to slow spending and reduce inflation. An increase in the Fed's rate can lead to higher borrowing costs for mortgages, car loans, and credit cards over time.
Minutes from the most recent Fed meeting indicated that most officials expect another interest rate increase will likely be necessary this year to combat inflation.
The Fed raised its key interest rate by a quarter-point to approximately 3.9% in September, marking its first increase in three years. This increase occurred despite President Donald Trump's repeated calls for the Fed to lower rates, prompting the president to criticize the Fed's rate-setting committee, although he still expressed support for Chairman Kevin Warsh, whom he appointed earlier this year.