The Federal Reserve's preferred inflation gauge moved further away from its 2% target in September, the Commerce Department reported Thursday, as American consumers continued to face price pressures across the economy. The personal consumption expenditures index rose 0.5% on a monthly basis and 3.6% from a year ago, matching economist expectations polled by LSEG. Core PCE, which strips out volatile food and energy prices, increased 0.3% monthly and 3.1% annually, also in line with forecasts. The headline reading represented a climb from 3.4% in August, while core PCE rose from 3% in the previous month.
The broader economy, however, delivered stronger than anticipated growth. The Bureau of Economic Analysis estimated that gross domestic product expanded at an annualized rate of 3.4% in the third quarter, exceeding the 3.2% forecast from economists surveyed by LSEG. Personal consumption led the expansion, while federal government spending reached its highest level in at least five years. Bret Kenwell, U.S. investment analyst at eToro, noted that while the PCE report offered no surprises, both headline and core readings hit their highest levels since May, suggesting inflation remains entrenched. The stronger GDP performance confirmed that demand remained resilient despite inflation pressures tied to that demand.
Economists remain divided on the implications for monetary policy. James McCann, senior economist for investment strategy at Edward Jones, said the U.S. consumer and emerging artificial intelligence investment boom continue to drive the economy, with growth running well above trend. He suggested this robust performance might prompt questions about why the Federal Reserve did not raise rates at its October meeting, particularly with PCE climbing above the Fed's target. McCann added that Federal Reserve Chair Kevin Warsh's reluctant signals at the FOMC meeting, combined with dissenting votes favouring a rate increase and messaging that financial conditions were not tight, point toward a return to tightening in December and potentially another hike in 2027.
The Fed held interest rates steady at its October meeting, but market expectations suggest movement ahead. The CME FedWatch tool showed a 79.6% probability the central bank will increase rates by 25 basis points in December, which would push the federal funds rate to a range of 4% to 4.25%. Meanwhile, the personal savings rate fell to 3.8% of disposable income in September from 4% in August, continuing a downward trend from a peak of 6.2% in April 2025.
Stock markets reacted negatively to the data. The S&P 500 Index declined more than 0.4% after the market opened Thursday morning, the Dow Jones Industrial Average fell over 0.3%, and the Nasdaq Composite slid more than 1.4%. For American savers and borrowers, persistent inflation above the Fed's target combined with a falling savings rate means purchasing power continues eroding while opportunities to build financial cushions remain limited.