Inflation Squeezes Households as Fed Holds Rate Power

Households saved just 4.1% of after-tax income in the third quarter as prices rose and the Federal Reserve held its benchmark interest rate between 3.75% and 4%. The savings figure remains preliminary. Growth looks strong on paper. Yet the cost of living still presses on people’s budgets.

Who Pays for the Price Surge

The personal consumption expenditures price index, the Fed’s preferred inflation measure, climbed 3.6% from a year earlier in September, up from 3.4% in August. Its monthly increase reached 0.5%, the highest since May, according to the Associated Press. Core PCE, which excludes food and energy, rose 3.1% annually and 0.3% for the month.

Energy costs drove much of September’s increase. Gasoline and other energy goods rose 9.2% for the month, while energy goods and services broadly increased 5.4%. Gasoline averaged about $4.25 a gallon nationwide, and U.S. oil topped $100 a barrel, compared with less than $70 before the Iran war.

President Donald Trump campaigned in 2024 on reducing prices, including bringing gasoline below $2 a gallon. Polls showed rising inflation had soured most voters on the economy and Trump’s handling of rising costs. The New York Times reported many Americans held Trump and congressional Republicans responsible for failing to deliver on promises to improve affordability. The midterm elections are next week. The reports describe voter frustration, not a change in who sets monetary policy.

September consumer spending rose 0.5%, below the 0.6% forecast. Personal income increased 0.2%, below both the 0.3% increase reported for August and the 0.3% estimate. After-tax income, adjusted for inflation, rose over the quarter but fell in September.

Growth, Investment and Unequal Gains

U.S. gross domestic product grew at a 3.4% annual rate in the third quarter, July through September, above the 3.1% estimate. Consumer spending, which accounts for more than two-thirds of economic output, rose at a 3.8% rate. Gross private domestic investment surged 19.4%, including a 20.9% increase in equipment spending and an 8.4% rise in intellectual-property products.

Investment in artificial intelligence, consumer spending and government spending contributed to growth. A Washington Post report described businesses rushing to capitalize on the AI boom, while MarketWatch characterized the expansion as fueled by the AI revolution and a wealth effect among wealthier Americans. The investment surge has its own gatekeepers. Fed Chairman Kevin M. Warsh said interest rates affect which AI projects get financing, how much capital they attract and the returns investors require.

The Fed Holds the Levers

Fed officials voted 10-2 on Wednesday to keep interest rates steady, following an increase the previous month. Lisa D. Cook and Beth M. Hammack voted for a quarter-point increase. Investors expected a possible increase at the Fed’s final meeting of the year in December, with potentially several more next year; officials said decisions would depend on incoming data.

Waiting carries risks for people living with price increases. “Waiting is not costless,” said Claudia Sahm, a former economist at the Fed who is now the chief economist at New Century Advisors. She warned that if inflation risks proved real, “the Fed will have to do more.” Initial jobless claims edged down to a seasonally adjusted 194,000 for the week ended Oct. 24, below the 200,000 estimate.

Warsh said the economy was strong but inflation remained elevated. “The period right in front of us is information rich. There is a lot that's happening in the world. My colleagues and I are keen to take notice of it,” he said. On AI investment, he added, “Interest rates get in the cracks. Interest rates affect directly, or indirectly, almost everything.”