Commerce department data contrasts with sharp deterioration in consumer sentiment as investment, which have more than offset the impact of higher oil prices resulting from the conflict in the Middle East.
These results stand in stark contrast to the pessimistic economic outlook held by households, which is reflected in Donald Trump’s record-low approval ratings and a significant decline in consumer sentiment.
The economy is currently expanding at a rate well above the 2% level that some Federal Reserve officials consider to be non-inflationary. New data from the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, indicated that prices rose 0.5% in September, pushing the annualized inflation rate to 3.6%. In August, the PCE inflation rate stood at 3.4%.
Core inflation, which strips out volatile food and energy costs, climbed to an annualized 3.1%.
The consumer price index, a separate inflation measure released by the Department of Labor earlier in October, also indicated that inflation accelerated in September, with the annualized rate rising from 3.4% in August to 3.7% in September.
Despite the uptick in prices, the US central bank opted on Wednesday to keep its benchmark interest rate within the 3.75%-4% range, while acknowledging that inflation “remains elevated”.
Raising interest rates can help curb inflation, though it carries the risk of slowing economic activity and the labor market. Because inflation remains high, economists anticipate that the Fed will implement further rate hikes in December. The Fed chairman, Kevin Warsh, told reporters “economic activity is expanding at a strong pace,” noting that “while uncertainty remains, owing in part to geopolitical developments, domestic spending has been resilient.”
Given the growing influence of AI-related spending, some economists have suggested that the strong GDP growth might not accurately reflect the broader economy. Investors are increasingly concerned about the rising costs of long-term AI projects, where the return on investment remains uncertain. Tech companies have borrowed significant amounts over the past year to fund AI initiatives, creating a potential downside risk for equipment spending. Nevertheless, economists had expected this pillar of support to weaken, though a reduction in spending was anticipated.
Consumer spending, which represents more than two-thirds of the economy, rose at a 3.8% pace during the July-September quarter, matching the growth rate seen in the second quarter. Historically low layoff numbers and moderate hiring are helping to support spending, although wage growth has occasionally failed to keep pace with inflation.
However, households have also been saving less and utilizing their personal savings to maintain spending levels. With average gasoline prices remaining above $4 a gallon—roughly $1 higher than a year ago—as the US-Israel war on Iran continues, economists expect a deceleration in consumer spending.
