U.S. inflation is already bad enough. It might get worse.

By Jeffry Bartash

High energy costs aren't the only source of rising prices

A woman shops for food in California. High energy prices might be raising the cost of groceries.

Federal Reserve Chairman Kevin Warsh has vowed the Fed will smite high inflation - but the death blows won't come fast or easy.

The daunting challenge faced by the Fed was illustrated by the latest snapshot on inflation in October. The consumer-price index rose sharply for the third month in a row and the 12-month inflation rate moved to three-year high of 4% - unoffically, that is.

The disappointing October CPI immediately spurred Wall Street to pencil in another Fed interest-rate increase at the bank's next meeting in December. Investors now see a 100% chance of a Fed rate hike, with some even betting on an aggressive half-point move.

Yet it wasn't the big rise in consumer prices by itself that was cause for worry. Rather, it was evidence the tentacles of inflation had spread beyond energy and deeper into the economy. The cost of virtually all goods and services rose last month.

"Price pressures had been concentrated in a few categories, but the latest data suggest that these pressures may be broadening," Fed governor Michelle Bowman acknowledged in a speech after the CPI report.

Oil spillover

Since Warsh took over as Fed chairman in May, he's repeatedly insisted the central bank would restore "price stability" by reducing the rate of inflation to its annual target of 2%. The Fed has failed for more than five years to reach its goal.

Through the summer, most of the increase in inflation appeared tied to a spike in oil and gas prices following the war with Iran. Americans paid more to fill up their cars and to fly on planes. Companies paid more for transportation costs.

By and large, most companies tried to avoid passing on their own higher energy costs to customers, who were already frustrated by years of rising inflation. Yet business leaders and economists warned companies could only hold out for so long.

They appear to have been right. The higher cost of energy now seems to be coursing through virtually the entire economy, based on the latest inflation readings.

If higher energy costs were the only problem, a cautious Fed might be able to wait it out. Oil prices (CL00) (BRN00) seldom stay high for long. In the last two weeks alone, for instance, the cost of U.S.-traded oil has plunged 17% to $86.45 a barrel, from $104.

But oil is not the only problem.

Broader inflation

For one thing, the Trump administration put in place new tariffs last spring after the Supreme Court struck down the original ones. Tariffs are still adding to the overall cost of goods - they have risen for four months in a row.

The massive boom in artificial intelligence, meanwhile, has become a surprising source of inflation. Prices have risen for construction materials, computer chips and other technology products needed to build data centers.

Finally, consumer spending rose in the spring and summer, instead of softening as expected. All the demand has nudged prices even higher.

"The CPI data shows that inflation remains hot and it's not just energy, or tariffs, or even AI-related bottlenecks," said Sonu Varghese, global macro strategist at the Carson Group. "It's a much broader problem."

Signs of the economy's strength are evident in robust spending on dining out and traveling - the sort of discretionary purchases that Americans tend to sacrifice when times are tough.

Americans still go out to eat a lot even as restaurant prices continue to rise, and people are flying as much as ever despite a surge in ticket prices.

"Higher airline fares haven't slowed the demand for flying," noted Jeffrey Roach, chief economist at LPL Financial in Charlotte, N.C.

All of these sources of inflation suggest prices will continue to rise through the end of this year and into early 2027, keeping the pressure on the Fed to raise interest rates at least a few more times.

Long-lasting problem?

Beyond that? Many economists say there's good reason to believe inflation will start to wane by next spring.

Lower oil prices would clearly help, for one thing, and roll back some of the recent increase in prices.

The AI boom, for its part, could lose momentum due to public resistance to data centers, Democratic efforts to reign in the industry and the stunning resignation of Nvidia (NVDA) CEO Jensen Huang, who led the chip maker at the heart of the AI revolution.

The effect of the Trump tariffs, meanwhile, are expected to fade as a source of inflation, especially if Democrats manage to roll some of them back once they take control of the House of Representatives and Senate in January.

Finally, a few more Fed rate hikes could temper the economy's growth and cast a slight chill on inflation.

Will all of that be enough to slow the rate of inflation by next spring to 3% or less? Not everyone is convinced.

Fed governor Chris Waller, an influential voice at the central bank, said the effects of higher energy prices and the AI boom could linger. He cited high insurance costs for the shipment of oil through the Middle East and high diesel prices as likely to be persistent sources of inflation.

Unlike gas for cars, diesel is in short supply because of a lack of global refining capacity, a problem that will continue for some time.

"Diesel remains eye-wateringly expensive," said Thomas Simons, chief U.S. economist at Jefferies.

The problem is that the U.S. economy is reliant on diesel to transport goods around the country to grocery stores, retailers and other businesses. It's a big part of transportation costs for companies.

"Fed research indicates to me that energy price pressures may pass through to goods and services in a more sustained way than in the past," Waller said.

"Their findings do not encourage me to think that these factors will be fading anytime soon," added Waller, who is open to a more aggressive Fed rate hike in December.

-Jeffry Bartash

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