U.S. inflation and spending rise in September, reinforcing Fed rate hike expectations

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US inflation and spending rise

Highlights

September PCE Price Index rises 0.5% month-over-month and 3.6% year over year, reinforcing elevated inflation above the Fed's 2% target.
Core PCE inflation advances 0.3% in September and 3.1% year on year, with the Fed holding rates at 3.75%-4.00% amid expectations for another hike.
Nominal consumer spending climbs 0.5% in September, but real spending is flat, signaling weakening underlying demand into the fourth quarter.

September PCE data and rate outlook

As reported by Reuters, citing the Commerce Department's Bureau of Economic Analysis, the Personal Consumption Expenditures Price Index climbs 0.5% in September after an unrevised 0.3% rise in August. In the 12 months through September, PCE inflation advances 3.6% after an unrevised 3.4% increase in August, matching economists' expectations for the monthly reading.

Excluding food and energy, the core PCE Price Index rises 0.3% over the month after an upwardly revised 0.3% gain in August. Core PCE inflation increases 3.1% year on year in September after an unrevised 3.0% rise in August.

The figures are included in the government's advance gross domestic product report for the third quarter, which shows the economy growing at a 3.4% annualized rate. The Federal Reserve, which tracks the PCE measures against its 2% inflation target, leaves its benchmark interest rate in the current 3.75%-4.00% range while saying inflation remains elevated.

Fed Chairman Kevin Warsh tells reporters that energy and related prices have moved higher again in recent weeks, and that policymakers are focused on preventing relative price changes in some sectors from broadening across the economy while keeping inflation expectations anchored. Financial markets are pricing in an roughly 84.6% chance of a rate hike in December, according to CME's FedWatch Tool.

Consumer demand shows nominal strength, real momentum weakens

Higher prices lift consumer spending figures in September. Consumer spending, which accounts for more than two-thirds of economic activity, rises 0.5% after an unrevised 0.9% increase in August.

Adjusted for inflation, consumer spending is unchanged in September, suggesting households enter the fourth quarter on a softer real spending path. Spending increases at a 3.8% rate in the July-September quarter, underlining the gap between nominal outlays and underlying purchasing power.

Our earlier article on UBS Global Wealth Management’s outlook for a longer Fed tightening cycle highlighted how persistent inflation led the bank to project additional rate hikes beyond December, including another move in March 2027. We noted that firm goods and services inflation, along with broader risk factors, was reinforcing a “higher-for-longer” policy path and pushing market pricing toward greater odds of further tightening.

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