The U.S. economy accelerated in the third quarter while inflation strengthened in September, delivering a combination of resilient growth and persistent price pressure that could keep the Federal Reserve on a tightening path.
Real gross domestic product increased at a 3.4% annual rate during the July-through-September quarter, up sharply from 2.2% in the second quarter, according to the U.S. Bureau of Economic Analysis.
Consumer spending, investment and government spending contributed to the expansion, while declining exports provided an offset. Real final sales to private domestic purchasers — a measure of underlying private-sector demand — increased at a 4.9% annual rate.
The inflation picture was less favorable.
The PCE price index increased 3.6% from a year earlier in September and 0.5% from August. Core PCE inflation, excluding food and energy, increased 3.1% year over year. Personal consumption expenditures increased 0.5% in nominal terms, while real spending was essentially unchanged.
Those figures arrive one day after the Federal Reserve held its benchmark interest-rate range at 3.75% to 4.00%, leaving markets focused on whether policymakers will resume tightening before year-end.
The combination creates a difficult policy backdrop. Economic activity remains strong enough to withstand restrictive borrowing costs, while inflation remains materially above the Fed’s 2% objective.
The next question is whether consumer activity can maintain its momentum during the fourth quarter. September’s essentially flat inflation-adjusted spending suggests households entered the quarter with less momentum than the headline GDP figure alone implies.
For the Fed, the latest data provide little evidence that restrictive monetary policy has pushed the economy toward recession. They also provide little justification for declaring the inflation fight finished.
