Donald Trump-led Republicans enter the all-important US midterms in a backfoot, with the latest data released by the Commerce Department’s Bureau of Economic Analysis (BEA) showing that the inflation in the world’s largest economy picked up in September, with the Personal Consumption Expenditures (PCE) Price Index rising 0.5% from the previous month, compared with a 0.3% increase in August.
The monthly increase was in line with economists’ expectations. On an annual basis, PCE inflation accelerated to 3.6% in September from 3.4% in August, highlighting the persistence of price pressures across the US economy.
The core PCE Price Index, which excludes volatile food and energy components, increased 0.3% during the month, following an upwardly revised 0.3% gain in August.
Economists had previously estimated that core inflation rose 0.2% in August.
On a year-on-year basis, core PCE inflation climbed to 3.1% in September, up from 3.0% in August.
The figures, which are equally important for the Federal Reserve, given the latter’s dependence on the PCE measures as its preferred gauge for assessing progress towards its 2% inflation target, will also put pressure on the central bank to ramp up its policy measures to arrest the price rise.
The Federal Reserve left its benchmark interest rate unchanged at 3.75%-4.00% on Wednesday but acknowledged that inflation “remains elevated.”
With economic growth exceeding expectations and consumer demand continuing to support business activity, economists increasingly expect the central bank to consider another interest rate increase in December.
Strong GDP growth adds to inflation concerns
The inflation report was released alongside the government’s first estimate of third-quarter GDP, which showed the US economy expanding at an annualised rate of 3.4% between July and September.
The stronger-than-expected performance suggests that economic activity remains resilient despite elevated borrowing costs, geopolitical uncertainty, and persistent inflation.
Economic growth is also running well above the approximately 2% pace that some Federal Reserve officials consider consistent with keeping inflation under control.
The GDP figures also highlighted the growing importance of consumer spending and business investment in supporting economic activity, even as other components of the economy remained under pressure.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased at an annualised rate of 3.8% in the third quarter, matching the pace recorded in the previous quarter.
Services accounted for much of the increase, with healthcare, restaurant and bar visits, and hotel and motel stays supporting household expenditure.
However, spending patterns were less encouraging across certain categories of goods.
Purchases of motor vehicles and household furniture declined, suggesting that consumers were becoming more selective about discretionary spending.
Higher-income households have been responsible for a substantial portion of consumer expenditure.
Their spending capacity has benefited from rising financial wealth, particularly gains in stock market valuations associated with the artificial intelligence (AI) boom.
Meanwhile, American households outside the higher-income bracket have continued to rely on relatively stable employment conditions to sustain consumption, despite wage growth sometimes failing to keep pace with inflation.
Household savings decline as living costs rise
The combination of persistent inflation and relatively strong consumer spending has also raised questions about the sustainability of household demand.
Although the labour market has remained resilient, many Americans are increasingly relying on their accumulated savings to maintain their spending levels.
The personal saving rate declined to 4.1% in the third quarter from 4.4% in the second quarter.
It fell further to 3.8% in September, indicating that households were putting aside a smaller proportion of their disposable income.
Inflation-adjusted disposable personal income, which measures the money available to households after accounting for taxes and inflation, declined by 0.3% in September after remaining unchanged in August.
At the same time, real consumer spending was unchanged during September following a 0.5% increase in August.
The combination of falling real disposable income and stagnant inflation-adjusted spending suggests that households entered the fourth quarter with less financial room to absorb further price increases.
Analysts see the divergence between strong aggregate economic growth and household financial pressures becoming increasingly important as the Federal Reserve considers its next monetary policy decision.
If inflation continues to accelerate while real disposable income weakens, the central bank could face a difficult balancing act between containing price increases and avoiding excessive pressure on consumer demand.
AI investment drives business spending higher
Business investment emerged as another major contributor to US economic growth in the third quarter, with companies sharply increasing expenditure on equipment and intellectual property.
Spending on business equipment surged at an annualised rate of 20.9%, marking its fastest increase since the third quarter of 2020.
The increase contributed 1.16 percentage points to overall GDP growth, representing the largest contribution from equipment investment in six years.
Information processing equipment, particularly computers and peripheral devices, accounted for most of the increase.
The figures underline how investment in computing infrastructure and technology continues to reshape corporate spending patterns, particularly as businesses expand their AI capabilities.
Spending on intellectual property products also increased, rising at an annualised rate of 8.4% during the quarter.
This contributed just under half a percentage point to GDP growth, with software and research and development accounting for much of the increase.
However, the growing dependence on technology-related investment also presents potential risks to the broader economy.
Technology companies have borrowed substantial amounts over the past year to finance AI infrastructure and related projects.
Although these investments have supported equipment spending and economic growth, concerns are increasing over their long-term costs and uncertain financial returns.
Investors are also becoming more attentive to the capital requirements associated with AI development, particularly as companies commit substantial resources to data centers, computing equipment, and supporting infrastructure.
A slowdown in AI-related capital expenditure or a decline in technology stock valuations could therefore weaken two important sources of economic support.
This is particularly relevant for the Federal Reserve because sustained investment and consumer demand could keep inflationary pressures elevated even as monetary policy remains restrictive.
Imports and inventories shape third-quarter GDP
The strength of American consumer and business spending also translated into a sharp increase in imports during the third quarter.
Imports rose at an annualised rate of 19.7%, marking their fastest increase since the first quarter of 2025, when businesses accelerated purchases ahead of the implementation of higher tariffs announced by US President Donald Trump.
Imports are subtracted from GDP calculations because they represent goods and services produced outside the domestic economy.
Consequently, the latest increase reduced the headline growth rate despite reflecting strong underlying demand.
Higher imports reduced third-quarter US GDP growth by 2.64 percentage points.
However, this drag was more than offset by consumer expenditure, business investment, and the rebuilding of inventories.
Inventories contributed 1.61 percentage points to economic growth after businesses had drawn them down for five consecutive quarters.
The spending spree by the Donald Trump administration also supported the economy, increasing at an annualised rate of 5.3%.
The increase reflected a sharp recovery in federal government expenditure across both defence and non-defence categories.
Meanwhile, residential investment returned to contraction during the quarter.
Higher mortgage rates, partly reflecting the financial market uncertainty surrounding the Middle East conflict, weighed on housing demand despite some moderation in house prices.
The increase in borrowing costs has made housing less affordable for prospective buyers, limiting the positive impact that slower house price growth might otherwise have had on residential investment.
A broader measure of domestic demand, excluding inventories, international trade, and government spending, increased at an annualised rate of 4.9%.
This represented its strongest performance since the second quarter of 2021.
Final sales to private domestic purchasers also remained strong, highlighting the underlying strength of household and business demand.
However, economists questioned whether this pace of domestic demand could be sustained, particularly as higher prices and borrowing costs begin to affect household purchasing power.
US labour market remains resilient despite uncertainty
Alongside data on the latest inflation and GDP figures, the numbers on unemployment claims emerged as well, providing further evidence that the US labour market remains relatively stable.
Initial claims for state unemployment benefits declined by 1,000 to a seasonally adjusted 194,000 during the week ended October 24, according to the Labor Department.
The figure was below the 199,000 claims expected by economists polled by Reuters and remained close to levels last seen nearly 57 years ago.
The relatively low number of new unemployment claims suggests that businesses are continuing to avoid significant workforce reductions despite uncertainty surrounding the economic outlook.
Economists have described the current employment environment as a “low-hire, low-fire” labour market, in which companies are reluctant to expand recruitment but are also avoiding large-scale layoffs.
Strong corporate profits and resilient domestic demand have helped employers maintain existing workforces.
However, the ongoing Iran war and uncertainty over future economic conditions have made businesses more cautious about increasing headcount.
Continuing claims declined by 21,000 to a seasonally adjusted 1.701 million during the week ended October 17, measuring the number of people receiving unemployment benefits after their initial week of assistance.
The measure is closely watched because it offers an indication of how quickly unemployed Americans are finding new jobs.
The continuing claims period also coincided with the government’s household survey for October’s unemployment rate.
The unemployment rate stood at 4.2% in September and could remain broadly stable or decline slightly in October.
A Conference Board survey released on Tuesday showed that consumers had become more optimistic about labour market conditions during the month.
However, the relatively low unemployment rate also reflects a reduction in labour force participation, partly associated with the Trump administration’s immigration crackdown.
A smaller available labour force can help keep the unemployment rate low even when employment growth remains moderate.
Federal Reserve Chairman Kevin Warsh acknowledged the stability of the employment market following Wednesday’s monetary policy decision.
“On the employment side of the Fed’s dual mandate, conditions are quite positive,” Warsh told reporters.