The pace of price increases rose in September, keeping inflation above the Federal Reserve’s target, while the economy grew faster than expected in the third quarter, according to a Commerce Department report on Friday.
The price index of personal consumption expenditures increased by 0.5% seasonally adjusted for the month, bringing the annual inflation rate to 3.6%. The monthly increase was the biggest since March but was in line with the Dow Jones consensus, while the annual rate was 0.1 percentage point below.
Excluding food and energy, core PCE posted readings of 0.3% and 3.1%, respectively, in line with consensus. While the Fed follows these measures closely, officials generally view the core reading as an indication of long-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 rose at a seasonally adjusted annual rate of 3.4%, better than estimates of 3.1% and ahead of the 2.2% in the second quarter.
Also, in September consumer spending proved to be resistant, climbing 0.5%, a bit below the forecast for a gain of 0.6%, while personal income increased by 0.2%, compared to 0.3%.
The report comes a day after the Fed voted to hold its benchmark interest rate in a range between 3.75%-4%. Despite the high inflation reading, central bank officials insisted they could evaluate incoming data before deciding on the next step.
“The time ahead of us is rich in information. There’s a lot going on in the world. My colleagues and I want to see it,” Fed Chairman Kevin Warsh said Wednesday.
However, a deluge of data from Thursday showed the Fed could have more work to do.
A Labor Department report also released Thursday showed layoffs remained low. Initial jobless claims fell to a seasonally adjusted 194,000 for the week ended Oct. 24, below estimates of 200,000 and near levels last seen in the late 1960s.
Stock market futures turned negative after the release while Treasury yields also fell.
“Net, net, economic growth has been 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 considered a lost cause during much of the current Administration’s time in office, but real GDP has rebounded above the 3 percent run rate in Q3 2026 for the first time in years.”
Economic growth has been fueled by higher levels of investment in artificial intelligence, as well as high levels of consumer and government spending.
Consumer spending rose 3.8% in the third quarter, at the same pace as the previous period. Gross private domestic investment increased by 19.4%, driven by a 20.9% increase in equipment spending and an 8.4% increase in intellectual property products.
Real sales to private domestic buyers, a proxy 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 monthly basis, PCE prices rose 2.1% in headline numbers and 2.5% for core, down from 5% and 3.3% in the second quarter.
The rise in prices in September was driven mainly by rising energy costs that economists fear could spread to other parts of the economy. Gasoline and other energy goods rose 9.2% for the month while energy goods and services rose 5.4%.
At the same time, prices of services excluding energy and housing increased by 0.4%, and housing costs increased by 0.3%.