WASHINGTON (TNND) — Inflation remained elevated but held mostly steady in September in the Federal Reserve’s preferred measure of prices that is likely to clear the way for a broadly anticipated interest rate cut at next week’s meeting.
Prices rose by 0.3% in September compared the month prior, according to the personal consumption expenditures index released on Friday. On an annual basis, inflation rose 2.8%, a slight uptick from August’s 2.7%.
“Core prices,” which take out volatile food and energy categories, rose at 2.8%, a modest decline from the previous month’s rate of 2.9%. Month to month, core prices increased 0.2% in September, which would bring inflation back toward the Fed’s target of 2% if it continued throughout an entire year.
The report was delayed by more than a month to the prolonged government shutdown that has stats agencies playing catch-up to give economists, investors and the Fed information about how the economy is performing. Central bank officials will head into next week’s meeting with outdated information on October and November because of the shutdown-induced delays. Updated figures on the labor market and inflation will not be released until mid-December, after officials have already made their decision.
September’s inflation data is unlikely to sway the Fed out of a widely anticipated quarter-point rate cut at the conclusion of its December meeting on Wednesday. While there is division among officials on which end of their dual mandate to prioritize with rates, a handful of influential figures have voiced concerns about keeping the wobbly labor market from deteriorating any further.
Wall Street responded positively to the inflation data and markets are still heavily pricing in the quarter-point cut.
Fed officials are debating how to balance elevated inflation against a cooling labor market that has seen increasing employment and major layoffs, factors that are pulling at both ends of its dual mandate of stable prices and maximum employment. Inflation has been above its target of 2% for years and could increase if rates are cut too quickly but leaving them too high for too long risks sending unemployment higher.
Despite a bounceback month in September with 119,000 jobs added, unemployment crept up to 4.4%, the highest level in four years as more Americans joined the labor force and people who were out of work struggled to find new employment. Private sector measures of employment have also showed signs of distress with the most job cuts since 2020.
Officials have cut rates at back-to-back meetings by 0.25% each, bringing its benchmark rate down to a range of 3.75% to 4%.
Fed chair Jerome Powell cautioned after the October meeting that another cut in December was no sure thing and minutes showed a divide between officials on what their next steps should be.
Regional Fed bank presidents have voiced opposition to future cuts over inflation’s stubborn stickiness above the 2% target and have been given little new evidence of a slowdown. Meanwhile, another group of governors has pressed the case for lowering rates to preserve employment and that some of the recent gains in inflation are one-time increases because of President Donald Trump’s tariffs that will not continue. Those officials have also argued that weak hiring, slowing wage gains and reduced economic growth will mute the effects of future inflation and reduce the rate of price increases.
What impact Trump’s tariffs will have on inflation has been a challenging dynamic for the Fed and investors to parse through. The tranche of tariffs did not bring outsized inflation like economists had initially feared, but there are questions about how long businesses can continue to absorb the increased costs and what the economic uncertainty will do to economic growth.
Friday’s report also showed consumer spending continued to grow in the latest example of Americans being willing to open their wallets despite higher prices and wages that are struggling to keep up with inflation. But the rate of spending slowed in September with a 0.3% increase, compared to 0.5% in August.
Consumers spent a record figure during the crucial holiday shopping period starting on Black Friday and running through the weekend, according to initial estimates. Total season spending is up 7% year-over-year so far, according to Adobe Analytics. But shoppers are also putting more purchases on credit or using buy now, pay later services to finance their purchases. BNPL purchases are up 9% from last year in a sign of stressed budgets that could stall momentum.
Economists are seeing signs of strain in consumer spending despite generally solid total figures. Much of the spending is being driven by high-income households, while lower- and middle-class consumers are having to be more cautious or cut back where they can. Further deterioration of the labor market through the end of the year poses a risk to consumer spending, which powers the U.S. economy.