The pace of price increases stepped up in September, keeping inflation well above the Federal Reserve’s target, while the economy grew faster than expected in the third quarter, according to Commerce Department reports Thursday.
The personal consumption expenditures price index increased a seasonally adjusted 0.5% for the month, putting the annual inflation rate at 3.6%. The monthly increase was the largest monthly gain since March but in line with the Dow Jones consensus, while the annual rate was 0.1 percentage point below.
Excluding food and energy, the core PCE posted respective readings of 0.3% and 3.1%, in line with the consensus. While the Fed follows both measures closely, officials generally see the core reading as more indicative of longer-term inflation trends.
While inflation continued to run ahead of the Fed’s 2% target, the Commerce Department also reported that gross domestic product was strong in the third quarter.
GDP increased at a seasonally adjusted annualized pace of 3.4%, better than the 3.1% estimate and well ahead of the 2.2% in the second quarter.
Also, in September consumer spending proved resilient, climbing 0.5%, a bit below the forecast for a 0.6% gain, while personal income rose 0.2%, compared with the estimate for 0.3%.
The reports come the day after the Fed voted to hold its benchmark interest rate in a range between 3.75%-4%. Despite elevated inflation readings, central bank officials insist they can afford to evaluate incoming data before deciding on their next move.
“The period right in front of us is information rich. There is a lot that’s happening in the world. My colleagues and I are keen to take notice of it,” Fed Chairman Kevin Warsh said.
However, the data deluge from Thursday shows the Fed could have more work to do.
A Labor Department report also released Thursday showed that layoffs remain low. Initial jobless claims edged lower to a seasonally adjusted 194,000 for the week ended Oct. 24, below the estimate for 200,000 and near levels last seen in the late 1960s.
Stock market futures were negative following the releases while Treasury yields also fell.
“Net, net, economic growth is powering ahead despite the uncertainty of geopolitical risks and the damage posed to many sectors of the economy by higher energy costs,” said Chris Rupkey, chief economist at Fwdbonds. “The economy was thought to have been a lost cause during much of the current Administration’s time in office, but real GDP has bounced back above a 3 percent run rate in Q3 2026 for the first time in a year.”
Economic growth has been driven by higher levels of investment during the artificial intelligence build-out, as well as high levels of consumer and government spending.
Consumer spending rose 3.8% in the third quarter, the same pace as the prior period. Gross private domestic investment soared 19.4%, driven by a 20.9% surge in equipment spending and an 8.4% jump on intellectual property products.
Real sales to private domestic purchasers, a proxy that Fed officials use for underlying demand, rose 4.9%, compared with a 4.6% increase in the second quarter.
There was some good inflation news for the period: On a quarterly basis, PCE prices rose 2.1% on the headline number and 2.5% for core, down respectively from 5% and 3.3% in Q2.
September’s price increases were driven largely by a surge in energy costs that economists fear could be spreading to other parts of the economy. Gasoline and other energy goods saw a 9.2% rise for the month while energy goods and services broadly jumped 5.4%.
At the same time, services prices excluding energy and housing rose 0.4%, and housing costs increased 0.3%.
