Inflation edges further from the Fed's goal
The Federal Reserve's favored inflation measure moved further above its target in September, the Commerce Department reported Thursday. The personal consumption expenditures price index rose 0.5% from August and was up 3.6% from a year earlier. Economists polled by LSEG had expected both figures.
Core PCE, which leaves out food and energy because their prices swing widely, climbed 0.3% on the month and 3.1% over the year. That also matched forecasts. Fed officials pay close attention to the headline number as they try to return inflation to their long-run goal of 2%, though they regard the core reading as a better guide to underlying trends.
Both measures accelerated from August, when headline PCE stood at 3.4% and core at 3%. Goods prices were 3.9% higher than a year earlier, and services prices were up 3.5%.
Growth surprises to the upside
The same release included the first estimate of third-quarter gross domestic product. The Bureau of Economic Analysis put growth at 3.4%, above the 3.2% that economists surveyed by LSEG had projected. Two more revisions to the figure will follow.
Bret Kenwell, a U.S. investment analyst at etoro, said consumer spending led the expansion and that federal government consumption hit its highest level in at least five years. He said the report "confirms that demand remains resilient," even though it does little to relieve inflation pressure linked to that demand.
Household finances showed some strain. The personal saving rate was 3.8% of disposable income, down from 4% in August. It has fallen over the past two years from a peak of 6.2% in April 2025 and from 5.6% in January 2026.
What analysts are saying
Kenwell described the inflation report as offering little surprise but still a concern. He said both headline and core PCE reached their highest levels since May, which he said underscores that "inflation remains a stubborn issue."
James McCann, a senior economist at Edward Jones, credited what he called a "seemingly indefatigable U.S. consumer" and an emerging AI investment boom for growth running well above trend. He acknowledged that higher oil prices and tighter financial conditions could cool activity toward year-end.
McCann added that the data might lead investors to ask again why the Fed did not raise rates at its meeting a day earlier. In his view, Chair Kevin Warsh's reluctance to send strong signals, a bullish tone on growth, dissents in favor of a hike and a message that financial conditions were not tight all point to a return to tightening in December. He said one more increase in 2027 was also possible.
Rate expectations and markets
Warsh and his colleagues left interest rates unchanged at the October meeting, and two policymakers dissented. Markets continue to anticipate an increase of 25 basis points in December, which would lift the federal funds rate to a range of 4% to 4.25%.
The CME FedWatch tool showed a 79.6% probability of that move, down slightly from 84.2% a day earlier but above the 73.3% recorded a week before.
Stocks opened lower Thursday. The S&P 500 slipped more than 0.4%, the Dow Jones Industrial Average fell more than 0.3%, and the Nasdaq Composite dropped more than 1.4%. News outlets noted that the data arrived days before midterm elections in which the cost of living is a dominant issue.
