Inflation Remains Elevated but Americans Continue Spending Despite Federal Reserve Rate Increases

A key indicator of inflation closely watched by the Federal Reserve has indicated that prices stayed high in September, even as robust consumer spending and vigorous economic expansion continued.

Data released by the Commerce Department last Friday revealed that there was a 0.4% price increase from August to September, consistent with the rate observed the month before. Year-over-year inflation remained static at 3.4%.

The released statistics collectively portray a remarkably resilient consumer behavior. Consumers continue to drive the economy by maintaining high spending levels, even in the context of ongoing inflation and elevated interest rates. This persistent consumer expenditure is, in itself, contributing to sustained inflation across the economic landscape.

The rate of inflation observed in September surpasses the Federal Reserve’s annual target of 2% and adds to the already escalating costs for essential items such as housing, food, and fuel. Although the Federal Reserve is anticipated to maintain its key short-term interest rate during its upcoming meeting, there is a growing concern among policymakers that robust economic growth could perpetuate high levels of inflation, necessitating further increases in interest rates.

Since March of 2022, the Federal Reserve has elevated its principal interest rate from nearly zero to approximately 5.4% in a focused effort to mitigate inflation. Meanwhile, annual inflation—measured by the more commonly referenced Consumer Price Index—has seen a decline from its peak of 9.1% last June.

According to a report released on Thursday, vibrant consumer spending propelled the economy to a strong 4.9% annual growth rate in the third quarter of this year—its highest level in almost two years. A spike in consumer spending often incentivizes businesses to hike prices. Consistent with this, the government’s Friday report on inflation indicated that consumer expenditure surged by a substantial 0.7% last month.

The report also noted a surge in spending on services, led predominantly by increased expenditures on international travel, housing, and utilities.

When volatile components such as food and energy are excluded, the “core” prices increased by 0.3% from August to September. This is higher than the 0.1% increase observed in the previous month. Year-over-year core inflation has moderated to 3.7%, its slowest ascent since May 2021, down from 3.8% in August.

A contributing factor for the Federal Reserve’s likely decision to hold interest rates steady for the remainder of the year could be that the 3.7% year-over-year rise in core inflation aligns well with its quarterly forecast. Given that core prices have already reached this threshold, Federal Reserve officials are likely to take a cautious approach, monitoring economic conditions in the months ahead, as indicated by Chair Jerome Powell.

Robust employment conditions have served as a catalyst for consumer spending. Wages and salaries have generally outstripped inflation throughout the year. However, the Friday report also highlighted a slowing growth in total income—a category which encompasses wages, interest income, and government payments. After adjusting for inflation, there was a 0.1% decrease in after-tax income in September, marking the third consecutive month of decline. This contraction in income could potentially undermine consumer spending and economic growth in future months.

Frequently Asked Questions (FAQs) about Inflation and Consumer Spending

More about Inflation and Consumer Spending

• Commerce Department Inflation Report
• Federal Reserve’s Annual Inflation Target
• Consumer Price Index Data
• Economic Growth Rate for Q3 2023
• Employment Statistics and Wages Report
• Federal Reserve’s Key Short-term Interest Rate History
• After-Tax Income Trends