Consumer spending stalled in September as inflation remained stubborn

(CNN) — The last piece of official inflation data to land before the Federal Reserve’s policymaking meeting next week was a shutdown-delayed report that showed the pace of price hikes remained stubborn in September and consumer spending waned after a summer splurge.

The Personal Consumption Expenditures price index — the inflation gauge the Federal Reserve uses for its 2% target rate — rose 0.3% on a monthly basis, which lifted annual inflation from 2.7% to 2.8% in September, a rate last hit in April 2024, according to data released Friday by the Commerce Department.

Gas prices were on the high side in September, helping drive up overall inflation. Food prices also rose for the second month in a row.

However, energy and food prices can be quite volatile (and influenced by one-time factors), so the Fed also closely watches the core PCE price index, which excludes food and energy, as a way to gauge underlying inflation trends.

The core PCE index rose 0.2% from the month before, which slowed the annual rate to 2.8% from 2.9%.

Friday’s data came in largely as anticipated: Economists were expecting inflation to rise 0.2% from August and tick higher to 2.8%, according to FactSet.

Sticky, stubbornly high inflation running at a 2.8% rate is still above the Fed’s 2% target; however, it remains likely that the central bank will make another quarter-point cut at its policy meeting next week, said Elizabeth Renter, senior economist at NerdWallet.

But, at this stage, the other side of the Fed’s price stability and full employment mandate warrants more monetary policy attention as the labor market continues to cool, she said.

Friday’s data is “certainly not going to stop them from cutting,” she said of central bank officials. “I think it’d be different if we saw inflation accelerating and picking up.”

K-shaped strain

Friday’s report was originally scheduled for release on Halloween; however, the federal government’s historic shutdown (which lasted the entirety of October and a dozen days into November), delayed the collection, tabulation and dissemination of a host of critical economic data.

Although seemingly stale, Friday’s data is the most comprehensive monthly report on pricing trends and how US households are earning, spending and saving.

Americans also reined in their purchases somewhat in September. Spending rose 0.3% that month after ticking up by 0.5% during each of the three previous months.

When taking inflation into account, spending was flat in September, the lowest monthly reading since real spending dipped 0.1% in May (when car sales slumped after a spring buying frenzy fueled by tariff fears).

The fundamentals supporting consumer spending weakened in September as well, Friday’s report showed: Inflation-adjusted disposable income rose just 0.1% for the month.

“A silent majority of consumers is increasingly strained by a two-year affordability crisis and elevated borrowing costs,” Gregory Daco, EY-Parthenon’s chief economist, wrote in a note on Friday. “Slower income growth is pushing many upper-median, median- and lower-income families to draw down savings and rely more heavily on credit to sustain their habits.”

While trading down has become the norm for many households, a lot of the spending activity – particularly on services and discretionary areas – is being driven by higher-income individuals, he said, referencing what’s been deemed a “K-shaped economy.”

Sentiment improved but remains near historic lows

The higher cost of living, after years of elevated inflation, continues to weigh heavily on Americans. Consumer sentiment has slumped amid the persistently high price environment as well as high levels of uncertainty related to steep tariffs and other sweeping actions from the Trump administration.

A separate report released Friday showed that consumer sentiment in early December rose 2.3 points to a preliminary reading of 53.3, according to the University of Michigan’s latest survey.

That was a bigger increase than economists had expected and showed that Americans saw “modest improvements from November on a few dimensions,” Joanne Hsu, the survey’s director, said in a release.

Still, sentiment remains historically weak, near record lows, and “consumers continue to cite the burden of high prices,” Hsu said.

The holidays and the promise of a new year tend to bolster Americans’ feelings about the economy and what lies ahead, NerdWallet’s Renter told CNN.

“I think people are optimistic and more willing to spend over the holidays and perhaps buck any negative sentiment they might be feeling at the time,” she said.

However, considering that the holidays can spur some irrational spending patterns, there does remain some concern about consumers’ financial health moving forward, she said.

“If they’re just amassing credit card debt and then getting behind on their payments, spending might not be all that great for the consumer,” she said.