An inflation gauge closely monitored by the Federal Reserve accelerated in September, with prices rising 3.6% from a year earlier, up from 3.4% in August, the Commerce Department reported Thursday. The increase, driven largely by elevated gas prices, signals persistent inflation less than a week before the midterm elections, where the cost of living has become a central campaign issue.
On a monthly basis, prices climbed 0.5% from August to September, marking the highest increase since May. This acceleration comes just one day after the Federal Reserve opted to pause its key interest rate hikes.
Rising gasoline prices contributed significantly to the inflation surge, with oil prices remaining above $100 a barrel due to renewed conflict in the Middle East. However, price increases were not confined to fuel costs. The cost of services, including shipping, hotel rooms, and utilities, saw rapid increases from August to September, indicating a broadening of inflationary pressures.
"The inflation outlook has become more concerning," Ksenia Bushmeneva, an economist at TD, 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."
Public sentiment regarding the economy appears to have soured due to inflation, with polls indicating dissatisfaction with President Trump's handling of rising prices. Trump had campaigned on reducing the cost of living, including lowering gas prices.
Excluding volatile energy and food categories, core inflation also saw a slight uptick. Core prices increased 3.1% from a year ago in September, up from 3% in August. On a monthly basis, core prices rose 0.3% from August to September, consistent with the previous month.
These inflation figures were released alongside a report showing the economy grew at a strong 3.4% annual rate in the third quarter, an acceleration from 2.2% growth in the second quarter. This growth was bolstered by a significant jump in consumer spending and increased business investment, partly fueled by spending on artificial intelligence infrastructure. Consumer spending climbed 3.8% at an annual rate in the third quarter, continuing a trend of robust growth seen in the previous quarter.
Despite the strong economic growth, there are indications that consumers may face challenges sustaining this spending pace. Inflation is diminishing disposable incomes; in September, after-tax incomes adjusted for inflation declined by 0.3% from the prior month. Consumers appear to be drawing on savings or increasing credit reliance to finance their expenditures.
"Together with higher borrowing costs, these headwinds are likely to weigh on consumer demand in the coming quarters," Bushmeneva noted.
The personal consumption expenditures (PCE) price index, the Fed's preferred inflation metric, allows for adjustments in consumer spending habits and is considered a broader measure than the consumer price index (CPI). The Federal Reserve maintains its dual mandate of achieving maximum employment and price stability. Persistent inflation could prompt the central bank to consider further interest rate adjustments at its upcoming December meeting.