The most recent official inflation data released prior to the Federal Reserve’s upcoming policymaking meeting was a report delayed by the shutdown, indicating that the rate of price increases persisted in September while consumer spending declined following a summer surge. The Personal Consumption Expenditures price index, which serves as the inflation measure for the Federal Reserve’s 2% target, experienced a monthly increase of 0.3%. This uptick resulted in a rise in annual inflation from 2.7% to 2.8% in September, a level not seen since April 2024, as reported by the Commerce Department on Friday. In September, elevated gas prices contributed to an increase in overall inflation. Food prices have increased for the second consecutive month. Nonetheless, energy and food prices exhibit significant volatility, often swayed by transient factors. Consequently, the Federal Reserve meticulously monitors the core PCE price index, which omits food and energy, to assess fundamental inflation trends. The core PCE index increased by 0.2% compared to the previous month, resulting in a decrease in the annual rate from 2.9% to 2.8%. Friday’s data aligned closely with expectations: Analysts had forecasted a 0.2% increase in inflation from August, resulting in a rise to 2.8%, as per reports.
Sticky, stubbornly high inflation persists at a 2.8% rate, exceeding the Fed’s 2% target. Nevertheless, it is probable that the central bank will implement another quarter-point cut during its upcoming policy meeting, according to Elizabeth Renter. However, at this juncture, the opposing aspect of the Fed’s dual mandate concerning price stability and full employment necessitates increased focus on monetary policy, given the ongoing cooling of the labor market, she stated. Friday’s data is “certainly not going to stop them from cutting,” she remarked regarding central bank officials. “It would likely present a different scenario if we observed inflation accelerating and gaining momentum.” Friday’s report was initially set for release on Halloween; however, the unprecedented federal government shutdown, which extended throughout October and into November for twelve additional days, postponed the collection, tabulation, and dissemination of a range of essential economic data. Despite appearing unremarkable, Friday’s data represents the most thorough monthly analysis of pricing trends alongside the earning, spending, and saving behaviors of US households.
In September, there was a noticeable moderation in American consumer purchases. Spending increased by 0.3% that month, following a consistent rise of 0.5% in each of the preceding three months. When considering inflation, spending remained unchanged in September, marking the lowest monthly figure since real spending decreased by 0.1% in May, a period characterized by a decline in car sales following a spring buying surge driven by concerns over tariffs. The underlying factors influencing consumer spending exhibited a decline in September, as indicated by Friday’s report: Inflation-adjusted disposable income increased by a mere 0.1% for the month. “A silent majority of consumers is increasingly strained by a two-year affordability crisis and elevated borrowing costs,” Gregory Daco noted. “A deceleration in income growth is compelling numerous upper-median, median, and lower-income households to deplete their savings and increasingly depend on credit to maintain their consumption patterns.” Although trading down has become commonplace for numerous households, much of the spending activity—especially in services and discretionary sectors—is being propelled by higher-income individuals, he noted, alluding to what has been characterized as a “K-shaped economy.”
The persistent increase in the cost of living, following an extended period of heightened inflation, remains a significant burden for Americans. Consumer sentiment has declined in the context of ongoing elevated prices and significant uncertainty stemming from substantial tariffs and various measures implemented by the Trump administration. A separate report released Friday indicated that consumer sentiment in early December increased by 2.3 points, reaching a preliminary reading of 53.3, as per the latest survey. The increase surpassed economists’ expectations and indicated that Americans experienced “modest improvements from November on a few dimensions,” stated Joanne Hsu. Nonetheless, sentiment persists at historically low levels, approaching record lows, and “consumers continue to cite the burden of high prices,” Hsu stated. The holiday season and the anticipation of a new year typically enhance Americans’ perceptions regarding the economy and future prospects, as noted by Renter. “I believe individuals exhibit a sense of optimism and are increasingly inclined to engage in spending during the holiday season, potentially countering any prevailing negative sentiments they may experience,” she stated. Nonetheless, given that the holiday season often triggers certain irrational spending behaviors, there persists a degree of apprehension regarding the financial well-being of consumers in the future, she noted. “If individuals are merely accumulating credit card debt and subsequently falling behind on their payments, consumer spending may not be particularly robust,” she stated.