Fed Holds Rates as Consumers’ Buying Power Shrinks

The Federal Reserve left its key interest rate unchanged Wednesday as September prices rose and inflation-adjusted incomes fell, leaving consumers to absorb the squeeze while officials weigh a possible December increase. A higher rate could lift borrowing costs across the economy. The Commerce Department released the figures Thursday, less than a week before midterm elections, with the high cost of living a central issue for millions of Americans.

Prices Rise, Incomes Fall

Consumer prices climbed 3.6% in September from a year earlier, up from 3.4% in August. Month to month, prices rose 0.5%, compared with 0.3% in August and the highest reading since May. The increase didn’t stop at the gas pump: shipping, hotel rooms and utilities also became more expensive from August to September.

Gasoline drove much of the monthly rise. Renewed violence in the Middle East kept oil above $100 a barrel, compared with below $70 before the Iran war. Consumers can’t simply vote away the pressure at the pump: gas now averages about $4.25 a gallon nationwide.

Inflation-adjusted incomes after taxes fell 0.3% in September from the previous month. Consumers appear to be drawing on savings or relying on credit to keep spending, even as inflation eats into what their incomes can buy. The numbers describe a familiar imbalance: spending remains strong, but the room to sustain it is narrowing for the people doing the spending.

The Campaign Promise Meets the Price Tag

President Donald Trump campaigned in 2024 on lowering the cost of living, including bringing gas below $2 a gallon. Polls now show rising inflation has soured most voters on the economy and led them to give Trump poor marks on handling rising prices. The campaign promise and the current $4.25 average sit side by side, less than a week before voters head into midterm elections.

Core inflation, which excludes volatile energy and food prices, rose 3.1% over the year in September, up from 3% in August. Core prices increased 0.3% from August to September, matching the previous month. Fuel may dominate the headline, but the report also records pressure beyond the fuel market.

The economy grew at a 3.4% annual rate in the July-September quarter, faster than the 2.2% rate in April-June. Consumer spending rose at a 3.8% annual rate in the third quarter, its second straight quarter of strong growth and well above the 0.7% increase in the first three months of the year. Business investment also rose, fueled by spending on artificial intelligence infrastructure.

Who Sets the Cost of Borrowing

The Federal Reserve left its rate unchanged a day before the Commerce Department’s report. Strong growth and persistently high prices could make the Fed more likely to raise rates at its December meeting, potentially lifting borrowing costs across the economy. The decision belongs to the central bank; consumers face the consequences through borrowing costs and the shrinking purchasing power of their incomes.

Ksenia Bushmeneva, an economist at TD, wrote that “the inflation outlook has become more concerning” and that “underlying pressures are also broadening.” She said higher borrowing costs, alongside other headwinds, are likely to weigh on consumer demand in coming quarters. The report describes no grassroots organizing, mutual-aid effort or community response to the squeeze.

The figures come from the personal consumption expenditures price index. The Fed monitors it more closely than the better-known consumer price index because it gives less weight to housing prices and allows for changes in consumers’ shopping habits. The index tracks prices; the people paying them have fewer ways to make their incomes stretch.