A closely monitored inflation gauge revealed that price increases remained elevated in the United States in September, reflecting robust consumer spending and strong economic growth.
According to the report from the Commerce Department, prices rose by 0.4% from August to September, mirroring the previous month’s increase. Compared to the same period a year earlier, inflation remained unchanged at 3.4%.
The data suggests a resilient consumer who continues to spend briskly, driving the economy forward even in the face of persistent inflation and high interest rates. This strong consumer spending contributes to inflationary pressures across the economy.
September’s month-to-month price increase exceeded the pace consistent with the Federal Reserve’s 2% annual inflation target. It further added to the higher costs of essentials such as rent, food, and gas. While the Fed is expected to keep its key short-term interest rate unchanged in its upcoming meeting, policymakers acknowledge the risk that stronger economic growth could maintain high inflation, necessitating further rate hikes.
Since March 2022, the central bank has raised its key rate from near zero to approximately 5.4% to combat inflation. Annual inflation, as measured by the more widely followed consumer price index, has fallen from its peak of 9.1% in June of the previous year.
The government reported strong consumer spending, driving the economy to a robust 4.9% annual growth rate in the July-September quarter, the best performance in nearly two years. Consumer spending often leads businesses to raise prices, contributing to inflation. The government also noted a robust 0.7% increase in consumer spending in its report on inflation.
The report indicated that spending on services increased, with higher expenditures on international travel, housing, and utilities.
Excluding volatile food and energy costs, “core” prices rose by 0.3% from August to September, surpassing the 0.1% increase from the previous month. However, compared to the same period a year earlier, core inflation eased to 3.7%, the slowest rise since May 2021 and down from 3.8% in August.
The Federal Reserve may maintain its current interest rates through the end of the year, partly because September’s 3.7% year-over-year rise in core inflation aligns with the central bank’s forecast for the current quarter.
Given the current level of core prices, Fed officials are likely to proceed cautiously, as Chair Jerome Powell has previously indicated, closely monitoring the economy’s evolution in the coming months.
A robust job market has supported consumer spending, with wages and salaries outpacing inflation for much of the year. However, the report revealed that overall income growth, which includes wages, interest income, and government payments, has slowed. Adjusted for inflation, after-tax income declined by 0.1% in September, marking the third consecutive monthly decrease. Declining incomes could potentially weaken spending and economic growth in the coming months.