Inflation Held Steady in September, While Consumers Spent Robustly

Inflation remained cooler in September even as consumers continued to spend at a rapid clip, a sign that the economy is chugging along despite the Federal Reserve’s efforts to contain price increases by weighing on demand.

Price increases climbed by 3.4 percent in the year through September, based on the Personal Consumption Expenditures index. That was in line with forecasts, and matched the increase in August.

After stripping out volatile food and fuel to get a sense of the underlying trend in prices, a core price measure climbed by 3.7 percent, also in line with economist expectations and down slightly from a revised 3.8 percent a month earlier.

Fed officials aim for 2 percent inflation based on the measure released Friday — so prices are still climbing much more quickly than normal. But at the same time, price increases have moderated notably compared to the summer of 2022, when the overall P.C.E. measure eclipsed 7 percent. And encouragingly, inflation has come down even as the economy has remained very strong.

Friday’s report provided additional evidence of that resilience. Consumer spending continued to grow at a brisk pace last month, picking up by 0.7 percent from the previous month, and 0.4 percent after adjusting for inflation.

The question confronting Fed officials now is whether inflation can slow the rest of the way at a time when consumption remains so strong. Businesses may find that they can charge more if shoppers remain willing to open their wallets.

Inflation has slowed over the past year for a number of reasons. Supply chains became tangled during the pandemic, causing shortages that pushed up goods prices — but those have eased. Gas and food prices had shot up after Russia’s invasion of Ukraine, but have faded as drivers of inflation this year.

Some of those changes have little to do with monetary policy. But in other sectors, the Fed’s higher interest rates could be helping. Pricier mortgages seem to have taken at least some steam out of the housing market, for instance. That could help by spilling over to keep a lid on rent increases, which are a big factor in key measures of inflation.

But overall, the economy has been surprisingly resilient to higher borrowing costs. That is keeping the possibility of a further Federal Reserve rate move on the table, though investors still think one is unlikely.

Policymakers have raised interest rates to 5.25 percent, up from near-zero as recently as March 2022. Many have suggested that interest rates are likely either at or near their peak. Officials are widely expected to leave interest rates unchanged at their two-day gathering next week, which wraps up on Nov. 1.

But policymakers have been careful not to rule out the possibility of another rate increase, given the economy’s continued momentum.

A report yesterday showed that the economy grew at a 4.9 percent annual rate in the third quarter, after adjusting for inflation. That was a rapid pace of expansion, and was even faster than what forecasters had expected.

“We are attentive to recent data showing the resilience of economic growth and demand for labor,” Jerome H. Powell, the Fed chair, said in a recent speech, adding that continued surprises “could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

For now, officials are waiting to see if their substantial rate moves so far will feed through to cool the economy in coming months, especially because longer-term interest rates in markets have moved up notably in recent months. That is making it much more expensive to take out a mortgage or for companies to borrow to fund their operations, and could cool the economy if it lasts.