US inflation picked up in September as households faced higher prices and declining real income. The personal consumption expenditures (PCE) price index rose 3.6% from a year earlier, up from 3.4% in August, while the monthly increase accelerated to 0.5% from 0.3%—its fastest pace since May. Separate data showed the economy grew at a 3.4% annualized rate in the third quarter, with consumer spending still strong. But inflation-adjusted after-tax income fell 0.3% in September, raising questions about how long households can sustain that spending.
Energy costs and services add to inflation pressure
Higher gasoline prices were a key driver of the acceleration in headline inflation. Renewed tensions in the Middle East have kept oil above $100 a barrel, compared with prices below $70 before the war with Iran. The national average price of gasoline is now about $4.25 a gallon.
Price increases also spread beyond fuel. Transport, hotel rooms and utilities all became more expensive from August to September, pointing to broader inflation pressure across services. Ksenia Bushmeneva, an economist at TD Bank, said the inflation outlook had become more concerning: gasoline was pushing up headline inflation, while underlying price pressures also showed signs of widening.
Excluding volatile food and energy prices, core PCE inflation was 3.1% year over year in September, compared with 3.0% in August. It rose 0.3% month over month, matching the previous month's increase. The Federal Reserve closely tracks the PCE index. Its monthly movements are often similar to those of the Consumer Price Index released earlier in the month, but PCE gives housing a smaller weight and accounts for shifts in what consumers buy.
Growth held up as real after-tax income slipped
The US economy expanded at a 3.4% annualized rate from July through September, faster than the 2.2% pace recorded from April through June. Consumer spending and business investment both increased, with investment supported in part by spending on artificial-intelligence infrastructure.
Consumer spending grew at a 3.8% annualized rate in the third quarter, its second consecutive quarter of solid gains and well above the 0.7% increase in the first three months of the year. Yet after adjusting for inflation, after-tax income fell 0.3% in September, leaving households with less purchasing power. Some consumers may be relying on savings or credit to maintain spending.
Bushmeneva said income pressure could weigh on demand in coming quarters, particularly while borrowing costs remain high. Whether consumer spending can stay strong is uncertain if households increasingly need to draw on savings or use credit to keep up their purchases.
Fed holds rates as inflation complicates December decision
The Federal Reserve left its benchmark interest rate unchanged a day before the inflation and economic data were released. Strong growth alongside persistently elevated prices could make the Fed's December rate decision more difficult. If inflation pressures continue, borrowing costs may also remain under pressure.
September's PCE figures point to an economy with resilient activity and consumer spending, but also falling real income, rising service prices and elevated oil costs. These factors could shape both household demand and the inflation outlook as the Fed weighs price stability against the economy's capacity to absorb tight financial conditions.