More Worries For The Fed: Inflation Powers Through September

Last week the Bureau of Labor Statistics (BLS) announced that inflation had flared up for the second consecutive month. From average Americans with savings accounts to Ben Bernanke and the Fed, rising prices could change how people look at their financial responsibilities.

The BLS found that the Consumer Price Index rose by 0.6 percent in September, the second consecutive monthly increase by that amount. Over the past year, inflation is still just a mild 2.0 percent, but considering that more than half of that increase occurred in the last two months, it is the recent acceleration of inflation that is worrisome.

The potential effects of inflation

Here are four things to note on rising inflation:
  1. Wiping out a year of interest on savings accounts. If 0.6 percent doesn't sound like much inflation, keep in mind that this is just one month's increase. If inflation continued at that rate for a year it would amount to more than 7 percent. To look at it another way, September's inflation alone was enough to wipe out the value of a full year's worth of interest on most savings accounts. Taken together, August's and September's inflation were enough to wipe out the value of a year's worth of interest on even the highest-yielding savings accounts.
  2. More than an aberration? Any given month's inflation number can be dismissed as an aberration, but on the heels of an identical increase in August, September's inflation takes on greater significance. Once may be an aberration, but twice starts to look like a pattern. October's inflation number will show whether this has the makings of a trend.
  3. Don't blame the Middle East. As was the case in August, higher gasoline prices were the driving force behind September's inflation. It's customary to expect that higher gas prices were driven by a rise in crude oil prices, but that was not the case in September. Crude oil prices actually leveled off during the month, while retail gas prices continued to rise. It seems it was more domestic supply-and-demand issues rather than crude oil prices that drove gasoline higher this time around. The good news is that so far in October, both oil and gasoline prices seem to have flattened.
  4. Gives them something to talk about. The resurgence of inflation should make for a lively discussion at next week's Fed meeting. If inflation looks threatening, the Fed may have to back off from its low interest rate policies a little bit. Recent improvement in unemployment actually gives them a little latitude to do that. Given the chronic weakness of the job market, it's unlikely the Fed will adjust course just yet, but between the latest job and inflation numbers, it suddenly has a changing set of conditions to take into account.

Between the presidential debates and the World Series, the high inflation number received relatively little press this week, but that may be one more reason to worry. It's generally the economic problems people don't see coming that hurt the most.