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Underlying Inflation Accelerated to a Four-month High in September

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the staff of the Ridgewood blog

Ridgewood NJ, the Federal Reserve’s preferred measure of underlying inflation saw an uptick to a four-month high in September, and consumer spending also showed an increase, leaving the possibility of another interest rate hike in the near future. The core personal consumption expenditures price index, which excludes volatile food and energy components, rose by 0.3% in September, as reported by the Bureau of Economic Analysis. Inflation-adjusted consumer spending saw a 0.4% increase last month.

This data indicates that resilient consumer demand, coupled with rising inflation, is propelling momentum into the fourth quarter. Although economists expect consumer spending to slow down in the coming months, the Federal Reserve has cautioned that strong data could influence their decision to continue tightening monetary policy. According to Omair Sharif of Inflation Insights LLC, these figures suggest that the Fed should be vigilant for potentially higher core inflation prints by year-end.

Nonetheless, policymakers are widely expected to keep the benchmark interest rate unchanged at their upcoming meeting. The rapid rise in borrowing costs, with 10-year Treasury yields exceeding 5% for the first time in 16 years, has contributed to the Fed’s cautious stance.

One area of concern for officials is service-sector prices, which rose by 0.5%, the most significant increase since January. Excluding housing and energy, services inflation accelerated to 0.4% from 0.1% in the prior month.

Consumer spending was driven by both goods and services, including purchases of cars, prescription drugs, and international travel. The strong labor market is a critical factor supporting household spending, and the record surge in household wealth this year, along with savings accumulated during the pandemic, has also played a role. However, the declining saving rate, which fell to 3.4%, raises concerns about whether Americans can sustain this level of spending through the end of the year.

Recent economic data showed that economic growth accelerated to a robust 4.9% annualized pace in the third quarter, driven by the strongest consumer spending since 2021. Friday’s report sheds light on the potential sustainability of the underlying trend in consumer spending. Forecasts for this quarter anticipate a modest 0.7% annualized economic growth, partly due to the increasing burden of high borrowing costs on households and other potential factors that could limit growth, including the resumption of student loan payments and geopolitical events like the Middle East conflict.


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