US inflation rises more than expected ahead of midterm elections

US inflation rose by more than expected in the year to September, according to official figures, in the final data release before the midterm elections next month.

The pace of price rises increased to 3.7%, up from 3.4% in the 12 months to August.

Inflation was above forecasts, driven by higher gasoline prices which have spiked following disruption to Middle East energy supplies due to the US-Israel conflict with Iran.

The elections are being fought over cost of living pressures across the US.

What is inflation?

Inflation is the rate at which the price of products or services increase over time.

For example, if a bottle of milk costs $1 but rises to $1.10 a year later, then annual inflation for bottled milk is 10%.

Officials from the Bureau of Labor Statistics measure inflation through the consumer price index (CPI).

It tracks the price changes of hundreds of different goods and services, from groceries, to clothing, energy and medical services.

These are things purchase for their day-to-day lives and the the Bureau of Labor Statistics uses the data to work out the overall level of inflation in the US economy.

The bureau, which has been measuring inflation for more than 110 years, updates this so-called basket of goods over time as peoples' spending and lifestyle habits change.

Cars and radios were not included in early data, while ice was later replaced by refridgeration in the energy section alongside fuel and electricity.

What causes inflation?

There are several factors that can cause inflation to rise.

If demand for a product outstrips its supply, that can lead to producers raising prices - the craze for Labubu dolls in recent years and the high resale prices are an example.

Higher incomes can also lead to higher demand, for example, which in turn pushes up prices.

Supply can also affect inflation. If supply of a product is reduced, but demand remains constant, that will cause prices to rise. A good example of this is crude oil, which is used to make gasoline and diesel.

Before the US-Israel war with Iran began, it was trading at just over $70 a barrel but when the conflict constricted crude supplies, the price quickly rose and is currently over $100.

How have tariffs affected inflation?

Since coming into office for the second time, President Donald Trump has introduced tariffs on most US trading partners around the world.

Some of the initial tariffs announced last year were scaled back by the president as the US made trade agreements with countries. In February, the Supreme Court outlawed most of the remaining additional global levies.

However, the president immediately announced a new 10% global tariff to replace the ones struck down by the court.

While Trump argued the tariffs would increase America's tax earnings, boost manufacturing and encourage people to buy US-made goods, the higher import taxes have also had an impact on inflation, according to research from the Federal Reserve Bank of New York.

Higher tariffs - which are levies that businesses pay on the goods they import - directly raise prices for US companies unless the overseas firms they are buying from lower prices to absorb some of the cost.

In response to the higher tariffs introduced by the president, the New York Fed found exporters reduced prices very little, meaning US-based businesses ended up absorbing nearly 90% of the cost of the added tax.

Indirectly, higher tariffs also affected the prices of locally made goods, as many US producers rely on parts, materials or ingredients from overseas.

Overall, the Fed found that every percentage point increase in average tariffs led to nearly a 0.25% price increase for consumer goods after one year.

Has inflation been worse lately?

While inflation is currently above where the US Federal Reserve would like - it has a target of 2% - it has been much higher in previous years.

During the Covid pandemic, issues such as supply chain disruption started pushing inflation up.

Additionally, in early 2022 when Russia launched its full-scale invasion of Ukraine, oil prices surged over $100 a barrel.

Both of these factors helped to drive inflation to a peak of about 9%.

Can inflation ever go down?

It's important to note that if inflation is rising at a slower rate, that does not mean prices are going down - it simply means prices are rising at a slower pace.

A bit of inflation is considered good for an economy as the the Federal Reserve's target rate illustrates.

Many central banks consider inflation of about 2% or a little higher to be stable, and at a level that doesn't impact people's purchasing decisions.

Much below that, people can delay spending if they expect prices to fall further. That can lead to businesses reducing wages, or reducing the number of workers to cope with lower demand.