US inflation accelerated to 3.7% in September as gas and air fares climbed

U.S. inflation accelerated to 3.7% in September from a year earlier, up from 3.4% in August, the Labor Department said Wednesday. Monthly costs jumped 0.6% from August to September — the biggest gain in five months, and an acceleration from the previous month's 0.4% rise.

The data lands weeks before midterm elections that have centered on affordability. Gas, clothes, and air fares all got more expensive last month, and the persistence of price growth poses a problem for both congressional Republicans and a Federal Reserve mandated by Congress to seek stable prices.

What is driving the price increases?

Two forces stand out. The first is the Iran war, which began in late February and has disrupted oil and gas supplies. Gas prices jumped more than 9% from August to September, according to Wednesday's report. Pump prices have eased slightly in the past two weeks to a nationwide average of $4.33 a gallon, AAA reported, though that remains above a month ago.

The second force is the artificial intelligence buildout. Surging investment in data centers and AI has pushed up prices for semiconductors, computer chips, and the consumer electronics that use them. Goldman Sachs estimated in a report Tuesday that the AI buildout has added about a half-percentage point to the annual inflation rate, measured by the Fed's preferred gauge.

That cost pressure has already reached store shelves. On September 1, Nintendo raised the price of its Switch 2 gaming system by 11% to $499.99. Apple's newest iPhone, the iPhone 17, costs about 10% more than its previous upgrade, though some of that likely reflects greater capabilities.

Rising input costs are also hitting food. Last week, PepsiCo said it will raise prices on snacks including Doritos, Ruffles, Sun Chips, and some sodas to offset higher costs for fuel, aluminum, and food ingredients.

The takeaway: this inflation has two distinct engines — a war-driven energy shock and an AI-driven demand surge — and each responds differently to policy.

What does the inflation picture look like beneath the surface?

Excluding volatile food and energy categories, core prices rose 2.6% in September from a year ago, up from 2.4% in August. Core prices climbed 0.3% from August to September. At that monthly pace, annualized inflation would run well above the Fed's 2% target.

The broader picture is one of stalled progress. Inflation fell sharply from its 9.1% peak in 2022 but has ticked higher this year since the war began. Fed Chairman Kevin Warsh said last month that inflation is not moving quickly enough back to the central bank's target — a statement that prompted the Fed to hike rates for the first time in three years, to about 3.9%.

In plain words: the easy progress on inflation is over, and the remaining gap to the Fed's target is not closing on its own.

How are consumers and voters responding?

Ongoing inflation has damaged Trump's standing with U.S. voters. A poll by The Associated Press-NORC Center for Public Affairs Research found that just 17% of U.S. adults approve of his handling of the cost of living. Only 26% approve of his handling of the economy overall — a new low.

Gasoline is the most visible symptom. Rising pump prices often drag down measures of consumer sentiment, and they raise shipping and other expenses for businesses, some of which pass those costs to consumers.

Will the Fed raise rates again?

Federal Reserve officials are watching inflation data closely to decide whether to raise their short-term interest rate further, and by how much. The Fed has a policy meeting October 27-28, but most Wall Street investors expect it to hold rates then and potentially implement another hike in December. Fed officials have penciled in just one more rate hike this year.

The catch: higher interest rates work by slowing spending and growth, yet much of the current inflation stems from supply shocks — such as the Iran war's disruption to oil and gas supplies — that rate hikes cannot fix. Warsh has said his goal is to keep the gas price spike from seeping into more areas of the economy. It already has: air fares are up about 22% from a year ago.

The central bank's dilemma is now explicit — its main tool addresses demand, while the pressures behind September's numbers are largely on the supply side, and the October 27-28 meeting will show how long it is willing to wait.