The U.S. Federal Reserve’s preferred inflation measure has seen its steepest monthly increase since April, adding an ironic twist to the recent optimism surrounding potential faster rate cuts. The core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices, rose by 0.3% in September and 2.7% year-over-year. Although headline inflation declined to 2.1%—the lowest level since early 2021 and just above the Fed’s 2% target—this “good news” may not be as reassuring as it appears.
When adjusted for inflation, consumer spending increased by 0.4%, driven by ongoing wage growth. However, this boost came at the expense of Americans’ savings, which fell to 4.6%, the lowest level since 2023.

These figures cap off a month of stronger-than-expected economic data, suggesting the Fed may want to think twice before it hits the rate-cut pedal too quickly in the months ahead. Following the hefty reduction in September, another cut is on the table for the Fed’s November 6–7 meeting, so it seems a cautious approach may now be in order.

The September inflation report highlighted persistent pressures in both goods and services prices. Excluding housing and energy, service costs grew by 0.3%, marking an uptick from the previous month, while goods prices (excluding food and energy) rose by 0.1%. Even food prices increased by 0.4%, the biggest jump this year. This comes with a price tag for all the consumer resilience on display.
Meanwhile, consumer spending on services—accounting for the lion’s share of household outlays—rose 0.2% in September, while goods purchases jumped 0.7%, as shoppers took advantage of some falling prices earlier this year.

As Americans head into election season, they’re left with a mixed economic picture: consumer spending remains resilient, even as the cost of living takes centre stage in political campaigns. The only real silver lining? Gas prices. Spending on fuel fell by 4% over the month, with only 3% of household income now going to this category—the lowest level since early 2021.

The estimate for third-quarter GDP indicated strong economic growth, supported by resilient consumer spending and an increase in defence spending.
In a separate report, the Bureau of Labor Statistics revealed that employment costs grew at a slower pace in Q3, with the Employment Cost Index rising by 0.8%. This marks the smallest increase since mid-2021. This moderation aligns with Fed Chair Jerome Powell’s recent statement that the labour market is “not a significant source of inflationary pressure.”

The Fed may have hoped for a quick pivot to lower rates, but the stubborn inflation and resilient consumer spending suggest the path may not be as smooth as expected. For now, rate cuts might need to wait their turn, even as the Fed keeps a wary eye on incoming data and evolving economic conditions.