Inflation Still Above Target
the staff of the Ridgewood blog
WASHINGTON, D.C. — The American economy is showing unexpected resilience as we head toward the close of 2025. In a report released by the Commerce Department on Tuesday, U.S. Gross Domestic Product (GDP) surged at a surprising 4.3% annual rate during the third quarter (July–September).
This performance blew past the 3.8% growth recorded in the second quarter and left Wall Street analysts scrambling; experts surveyed by FactSet had forecasted a much more modest growth rate of only 3%.
What’s Powering the Surge?
The U.S. economy’s total output is being fueled by three primary engines. Despite high interest rates and global uncertainty, the “American Engine” is firing on all cylinders:
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The Power of the Consumer: Consumer spending, which makes up roughly 70% of all U.S. economic activity, jumped to a 3.5% annual pace. This is a significant increase from the 2.5% seen in the previous quarter.
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Government Spending: Increased public sector investment contributed heavily to the quarter’s totals.
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Export Strength: American goods and services saw a healthy uptick in international demand.
The Inflation “Hidden Cost”: PCE Index Rises
While the headline growth number is cause for celebration, the report also contained a warning for the Federal Reserve. Inflation is proving to be “stickier” than policymakers had hoped.
The Fed’s preferred metric, the Personal Consumption Expenditures (PCE) Index, climbed to a 2.8% annual pace, up from 2.1% in Q2.
The “Core” Problem
When you strip away volatile food and energy costs, the Core PCE Inflation tells a similar story:
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Q3 Core PCE: 2.9%
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Q2 Core PCE: 2.6%
This uptick suggests that the fight against rising prices is far from over, potentially complicating the Federal Reserve’s plans for interest rate adjustments in early 2026.
What This Means for 2026
This “hotter than expected” data creates a mixed bag for the average American. On one hand, the job market and general economy remain robust. On the other hand, higher-than-target inflation (the Fed aims for 2.0%) means that the high cost of borrowing—from mortgages to car loans—may stay elevated for longer.
Economic Snapshot: Q3 2025
GDP Growth: 4.3% (Actual) vs. 3.0% (Forecast)
Consumer Spending: Up to 3.5%
Inflation (PCE): Rose to 2.8%
Key Takeaways for Investors and Homeowners
| Category | Trend | Impact |
| GDP Growth | ⬆️ Increasing | Stronger job market and business confidence. |
| Core Inflation | ⬆️ Increasing | Fed may delay further interest rate cuts. |
| Retail/Consumer | ⬆️ Increasing | Shows high confidence despite high prices. |
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