US inflation accelerates as rising prices erase consumer spending gains
By Mashood Siddiqi — SCN NEWS
WASHINGTON— U.S. inflation accelerated in September while consumer spending continued to rise in dollar terms, but the increase in household expenditure was almost entirely absorbed by higher prices, according to government figures released Thursday. The report presented a difficult picture for the Federal Reserve, showing an economy that continues to expand despite mounting pressure on consumers and renewed concerns that inflation could remain substantially above the central bank's target.
The Commerce Department's Bureau of Economic Analysis reported that its Personal Consumption Expenditures price index increased 0.5% in September, compared with a 0.3% rise in August. Over the preceding 12 months, the index climbed 3.6%, accelerating from 3.4% in August and remaining well above the Federal Reserve's 2% inflation objective. Consumer spending increased 0.5% during the month, equivalent to an additional $113.1 billion, but was virtually unchanged after adjusting for inflation.
The divergence between nominal spending and inflation-adjusted consumption is one of the most significant findings in the report. Americans spent more money on goods and services, yet the overall quantity of products and services purchased barely increased. The figures suggest that rising prices are absorbing a growing share of household budgets, raising questions about how long consumer demand can continue supporting economic growth without stronger gains in purchasing power.
The September data also showed that inflation pressures extended beyond the most volatile categories of household spending. Excluding food and energy, the core PCE price index increased 0.3% from August and 3.1% from a year earlier, compared with annual core inflation of 3.0% in August. The Federal Reserve closely monitors the core measure because it can provide a clearer indication of persistent price pressures that are less directly influenced by short-term fluctuations in energy and food markets.
The acceleration in inflation comes as higher gasoline and other energy prices affect household budgets and business costs across the United States. The continuing conflict involving Iran has disrupted expectations for global energy supplies, contributing to elevated oil prices and renewed inflation concerns. More expensive fuel can influence prices throughout the economy by increasing transportation, distribution and production costs, although the extent to which businesses pass those costs on to consumers varies across industries.
The latest figures reinforce the challenge facing Federal Reserve policymakers, who left their benchmark interest rate unchanged in a range of 3.75% to 4.00% at the conclusion of their October meeting on Wednesday. The central bank acknowledged that inflation remained elevated, while economic activity continued to expand. The decision reflected the difficulty of balancing price stability against the risk that higher borrowing costs could eventually weaken employment, business investment and household spending.
Federal Reserve Chair Kevin Warsh warned that policymakers must prevent increases in energy prices from spreading more broadly through the economy. The concern is that a temporary increase in fuel costs could influence wages, business pricing decisions and expectations about future inflation, making it more difficult to return price growth to the central bank's target. The September report offered little evidence that underlying inflation was moving decisively lower.
Financial markets responded by strengthening expectations that the Federal Reserve could increase interest rates at its December meeting. Futures pricing indicated an approximately 84.6% probability of a rate increase following the inflation release, according to CME Group's FedWatch Tool. Such expectations remain subject to change as policymakers receive additional information on employment, consumer prices and economic activity before their next decision.
The possibility of another increase in borrowing costs carries important implications for American households. Higher policy rates can influence the interest charged on credit cards, vehicle financing, business loans and some other forms of borrowing. Mortgage rates also respond to broader financial-market conditions and expectations about future monetary policy. For consumers already facing elevated prices, more expensive credit could further restrict discretionary spending and make major purchases more difficult.
Thursday's report nevertheless showed that the American economy retained considerable momentum during the third quarter. Gross domestic product expanded at an annualized rate of 3.4% between July and September, accelerating from 2.2% in the second quarter. Consumer spending and business investment contributed to that expansion, demonstrating that economic activity remained resilient despite the effects of higher prices and tighter financial conditions.
Consumer expenditure grew at a 3.8% annualized rate during the third quarter, underscoring the importance of household demand to the wider economy. Spending accounts for more than two-thirds of U.S. economic activity, making changes in consumer behaviour a critical factor in determining the country's growth outlook. However, the September figures suggest that momentum may have weakened towards the end of the quarter as price increases absorbed much of the rise in nominal expenditure.
The monthly spending figures illustrate that slowdown. Consumer expenditure rose 0.5% in September after increasing 0.9% in August. Once inflation was taken into account, real spending was essentially unchanged in September, compared with a 0.5% increase in August. The shift indicates that households were no longer increasing their purchases at the pace recorded earlier in the quarter, even though the amount of money they spent continued to grow.
Income data provided another warning about the pressure facing consumers. Personal income increased 0.2% in September, while disposable personal income, which measures income remaining after personal taxes, also rose 0.2%. Both increases were smaller than the monthly rise in consumer prices. As a result, inflation-adjusted disposable personal income declined 0.3%, indicating that households experienced a reduction in their purchasing power during the month.
The decline in real disposable income is particularly important because sustained consumer spending generally depends on income growth, accumulated savings or access to credit. When prices rise faster than incomes, households may respond by reducing discretionary purchases, drawing down savings or increasing borrowing. Each option carries potential consequences for future consumption, especially among families with limited financial reserves.
The personal saving rate stood at 3.8% in September, according to the Commerce Department. While the figure does not by itself establish financial distress, it provides additional context for assessing how much income households are retaining rather than spending. A prolonged period of weak real income growth could make it more difficult for consumers to maintain their spending patterns without reducing savings or relying more heavily on credit.
The report also showed that the $113.1 billion increase in nominal consumer spending was divided between goods and services. Expenditure on goods rose by $35.1 billion, while spending on services increased by $78.1 billion. Services therefore accounted for the larger share of the dollar increase, reflecting the continuing importance of activities such as healthcare, housing-related services, transportation and other household expenses in the consumer economy.
The figures do not mean that every household experienced the same increase in costs or the same change in spending. Inflation measures represent average price movements across a broad range of goods and services, while individual households face different expenses depending on income, location, housing arrangements and consumption patterns. Families that spend a larger share of their budgets on fuel, food and other essentials may experience greater financial pressure when those prices increase.
The inflation report arrives less than a week before the November 3 midterm elections, when the cost of living has become a major issue for voters. President Donald Trump and Republican candidates have defended their economic policies, while Democrats have focused criticism on rising household expenses and the affordability of essential goods. The new figures provide both parties with material for their competing arguments, showing strong economic growth alongside persistent inflation.
For the administration, the acceleration in economic output offers evidence that businesses and consumers remain active despite global uncertainty. For critics, the rise in inflation and decline in real disposable income raise questions about whether the benefits of economic growth are translating into improved living standards. The distinction between aggregate economic performance and household purchasing power is likely to remain central to the political debate.
The Federal Reserve faces a separate challenge because its mandate requires it to pursue price stability and maximum sustainable employment rather than respond to electoral considerations. Policymakers must assess whether persistent inflation warrants further monetary tightening while avoiding unnecessary damage to economic activity. Strong third-quarter growth may provide room for a more restrictive policy stance, but the weakness in inflation-adjusted September spending suggests that consumers could become more vulnerable if borrowing costs rise further.
The latest data also complicate expectations for the final quarter of the year. Economic growth in July, August and September was supported by substantial consumer expenditure, yet the final month's figures showed little real spending growth. If that pattern continues, household demand could contribute less to economic expansion even if nominal spending remains elevated because of higher prices.
Business investment may help offset some of that weakness, particularly in technology and artificial intelligence infrastructure, which have attracted substantial capital spending. However, investment-led growth does not necessarily eliminate the pressure that households experience when wages and disposable income fail to keep pace with inflation. The broader economic outlook will depend on whether price pressures ease, income growth improves and businesses continue investing despite relatively high financing costs.
The September report therefore reveals two different sides of the American economy. Overall output expanded strongly during the third quarter, and consumers continued spending substantial amounts of money. At the same time, inflation accelerated, underlying price pressures remained elevated and households experienced a decline in real disposable income during September.
For the Federal Reserve, the central question is whether the economy can sustain growth while inflation moves back towards 2%, or whether additional interest-rate increases will be necessary to restrain price pressures. For American consumers, the more immediate issue is whether their incomes can begin rising faster than the cost of the goods and services they purchase.
With another monetary policy decision approaching in December, Thursday's figures increase the importance of forthcoming inflation and employment reports. The strength of third-quarter growth gives policymakers reason to believe the economy can withstand some additional restraint, but the September spending figures offer a reminder that rising expenditure does not always mean households are becoming better off.