An inflation gauge closely monitored by the Federal Reserve accelerated last month, showing that prices remain elevated less than a week before midterm elections in which the uncomfortably high cost of living for millions of Americans has become a central issue.
Consumer prices rose 3.6% in September from a year earlier, the Commerce Department said Thursday, up from 3.4% in August. On a monthly basis, prices climbed 0.5%, up from 0.3% in August and the highest figure since May.
Rising gas prices drove much of the inflation increase as renewed violence in the Middle East has kept oil prices above $100 a barrel, up from below $70 before the Iran war. But prices also rose outside of fuel costs. The cost of services such as shipping, hotel rooms, and utilities increased rapidly from August to September, a sign that inflation is spreading and growing more entrenched.
“The inflation outlook has become more concerning,” Ksenia Bushmeneva, an economist at TD, a bank, wrote in a commentary on the report. “Price pressures are showing signs of heating up. Elevated gasoline prices are keeping headline inflation hot, but underlying pressures are also broadening.”
Polls show that the rise in inflation has soured most voters on the economy, leading them to give President Donald Trump poor marks on handling rising prices. Trump campaigned in 2024 on lowering the cost of living, including bringing the cost of gas below $2 a gallon. It currently averages about $4.25 a gallon nationwide.
Excluding the volatile energy and food categories, core inflation also picked up last month. It increased 3.1% from a year ago in September, up from 3% in August, the Commerce Department said. And from August to September, core prices rose 0.3%, the same as the previous month.
Separately, the government also said the economy grew at a strong 3.4% annual rate in the July-September quarter, much faster than the 2.2% growth in the April-June quarter, as consumer spending jumped and business investment rose, fueled by spending on artificial intelligence infrastructure.
Consumer spending climbed 3.8% at an annual rate in the third quarter, the second straight quarter of strong growth and far above the 0.7% increase in the first three months of the year.
Yet there are signs that consumers may struggle to maintain that level of spending. Inflation is eroding their incomes: In September, inflation-adjusted incomes, after taxes, declined 0.3% from the previous month. Consumers appear to be dipping into savings or relying on credit to fuel much of their consumption.
“Together with higher borrowing costs, these headwinds are likely to weigh on consumer demand in the coming quarters,” Bushmeneva said.”
The reports come a day after the Federal Reserve, the agency tasked with combatting inflation, left its key interest rate unchanged. Yet strong economic growth and persistently higher prices could mean more pain for Americans when the Fed meets in December. The Fed is much more likely to hike its key interest rate, which could lift borrowing costs across the economy.
Thursday’s inflation data comes from the personal consumption expenditures price index, which typically echoes the better-known consumer price index published earlier this month. The Fed more closely monitors the PCE index because it puts less weight on housing prices and allows for changes in consumers’ shopping habits.
In September, an inflation measure closely watched by the Federal Reserve showed a surge in consumer prices, which are now higher than they were the previous month. The Commerce Department reported that consumer prices rose by 3.6% year-over-year in September, an increase from the 3.4% recorded in August. On a month-to-month basis, prices increased by 0.5%, marking the highest rise since May and an uptick from the previous month’s 0.3% increase.
The primary driver of this inflation spike was the rising cost of gasoline, fueled by renewed violence in the Middle East, which has kept oil prices above $100 a barrel. This is a significant rise from prices below $70 before the onset of the conflict related to Iran. However, inflation is not limited to fuel; there were notable increases in the costs of services, including shipping, hotel accommodations, and utilities, indicating that inflationary pressures are becoming more widespread and entrenched.
Economist Ksenia Bushmeneva from TD Bank expressed concern over the inflation outlook, noting that price pressures are intensifying. The high gasoline prices are keeping overall inflation elevated, but there are also broadening pressures from other sectors of the economy.
Polls indicate that rising inflation has negatively impacted voter sentiment regarding the economy and contributed to poor approval ratings for President Donald Trump, who is campaigning in the 2024 elections with promises to lower living costs, including reducing gas prices to below $2 a gallon. Currently, the national average for gasoline is about $4.25 per gallon.
Core inflation, which excludes volatile food and energy prices, also saw an increase, rising to 3.1% year-over-year in September, up from 3% in August. On a monthly basis, core prices remained stable at a 0.3% increase, the same rate as the previous month.
In a separate report, the government revealed that the economy grew at a robust annual rate of 3.4% in the third quarter of the year, significantly higher than the 2.2% growth rate in the second quarter. This growth was driven by a surge in consumer spending and increased business investments, particularly in artificial intelligence infrastructure.
Consumer spending rose at an annual rate of 3.8% during the third quarter, reflecting two consecutive quarters of strong growth and significantly outpacing the 0.7% increase observed in the first quarter. However, there are indications that consumers may face challenges in maintaining such spending levels. Inflation is affecting real incomes, with inflation-adjusted incomes, after taxes, declining by 0.3% from the previous month. As a result, consumers may be relying on savings or credit to sustain their spending.
Bushmeneva pointed out that the combination of higher borrowing costs and inflationary pressures may negatively impact consumer demand in the upcoming quarters.
These inflation reports emerged just a day after the Federal Reserve opted to keep its key interest rate unchanged. Nevertheless, the strong economic growth along with persistently high prices could lead to more financial strain for Americans, especially when the Fed convenes again in December. There is a higher likelihood that the Fed will increase its key interest rate, which would subsequently raise borrowing costs across the economy.
The inflation data referenced comes from the personal consumption expenditures (PCE) price index, which is often seen as an extension of the consumer price index (CPI). The PCE index is more closely monitored by the Federal Reserve because it assigns less weight to housing costs and adapts to changes in consumer shopping behaviors more effectively.
Overall, the recent inflation figures underscore the pressing economic concerns that many voters face, with rising costs impacting their daily lives and casting uncertainty over the future economic landscape as the midterm elections approach.
