- US GDP grew at a 3.4% annualized rate in the third quarter, beating economists’ forecast of 3.1%.
- The personal consumption expenditures price index rose 3.6% year over year in September, while core inflation stood at 3.1%.
- Strong investment, resilient consumer spending and low jobless claims are complicating the Federal Reserve’s efforts to bring inflation back to target.
The US economy grew faster than expected in the third quarter, even as inflation accelerated in September, presenting the Federal Reserve with a difficult balance between controlling prices and sustaining economic momentum.
Gross domestic product increased at a seasonally adjusted annualized rate of 3.4% in the July-to-September period, according to Commerce Department data released Thursday. That exceeded economists’ expectations of 3.1% and marked an acceleration from the 2.2% growth recorded in the second quarter.
At the same time, the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.5% in September from the previous month. The annual inflation rate reached 3.6%, remaining well above the central bank’s 2% target.
Excluding food and energy, core PCE inflation increased 0.3% month over month and 3.1% year over year. The core measure is closely watched by policymakers because it can provide a clearer indication of underlying price pressures.
The figures followed the Fed’s decision Wednesday to hold its benchmark interest rate in a range of 3.75% to 4%. Officials have signaled that they want to assess incoming economic data before deciding on their next move.
“The period right in front of us is information rich. There is a lot that’s happening in the world. My colleagues and I are keen to take notice of it,” Fed Chair Kevin Warsh said.
The latest reports suggest that policymakers may have limited room to ease monetary policy while inflation remains elevated and economic activity continues to expand.
What is driving US economic growth?
Consumer spending and business investment remained major contributors to growth in the third quarter.
Consumer spending increased 3.8%, matching the pace recorded in the previous quarter. Gross private domestic investment surged 19.4%, supported by a 20.9% increase in equipment spending and an 8.4% rise in investment in intellectual property products.
Spending linked to the expansion of artificial intelligence infrastructure has helped support investment, alongside continued consumer and government expenditure.
Real final sales to private domestic purchasers, a measure of underlying private-sector demand closely watched by Fed officials, rose 4.9%, up from 4.6% in the second quarter.
Personal income, however, increased by a more modest 0.2% in September, below economists’ forecast of 0.3%. Consumer spending rose 0.5% during the month, slightly short of the expected 0.6%.
The labor market also showed resilience. Initial claims for unemployment benefits fell to a seasonally adjusted 194,000 in the week ending October 24, below economists’ expectations of 200,000. The reading pointed to continued low levels of layoffs.
The combination of steady household spending, strong investment and relatively limited job losses suggests that the economy has maintained momentum despite elevated borrowing costs and persistent inflation.
Why are inflation and interest rates still a concern?
Energy costs were a major contributor to September’s price increases. Gasoline and other energy goods rose 9.2% during the month, while energy goods and services overall increased 5.4%.
Economists are concerned that higher energy costs could feed into other parts of the economy, including transportation, production and household services. Services prices excluding energy and housing rose 0.4% in September, while housing costs increased 0.3%.
There was some encouraging news in the quarterly figures. Headline PCE prices rose at a 2.1% annualized rate in the third quarter, down from 5% in the second quarter. Core PCE prices increased at a 2.5% pace, compared with 3.3% previously.
However, the September figures indicate that monthly price pressures remain substantial, with energy costs adding to the challenge.
Financial markets reacted to the data, with stock futures moving lower and Treasury yields falling following the releases.
For the Federal Reserve, the central question is whether inflation will ease without a significant slowdown in economic activity. Strong growth and low layoffs reduce the immediate pressure to support the economy through lower interest rates, while rising prices argue for caution.
The latest figures do not determine the Fed’s next decision, but they reinforce the uncertainty surrounding the path of monetary policy. If energy prices continue to rise or spread into broader costs, policymakers could face a more prolonged period of restrictive interest rates. If inflation moderates while growth remains firm, the central bank would have more room to assess its options.
For now, the US economy is demonstrating resilience, but the combination of above-target inflation and strong demand means the path toward lower inflation remains uncertain.
