Personal income rose by a modest 0.2% month-over-month (m/m) in September, slightly below market expectations for a 0.3% gain. After adjusting for inflation, taxes, and transfers, real disposable personal income declined by 0.3%, following a flat reading in August.
Consumer spending rose by 0.5% m/m in nominal terms, roughly in line with expectations. However, higher prices—especially for gas—accounted for the entire increase, leaving inflation-adjusted spending flat on the month.
Real spending on goods declined by 0.3%, following a sizable gain in August. Durable goods, particularly motor vehicles and parts, led the decline, though spending was soft across most categories.
Inflation-adjusted spending on services advanced by a modest 0.2%. Spending on food services and accommodation remained resilient, rising by 0.5% on the month.
With spending outpacing income, the personal saving rate fell to 3.8% in September from 4.0% in August (revised down from 4.1%), its lowest level in four years.
Turning to inflation, core PCE—the Fed’s preferred inflation gauge—rose by 0.3% m/m in September, matching August’s pace and pointing to continued upward pressure on prices. Year-over-year core PCE inflation edged up to 3.1% from 3.0% in August.
Key Implications
Consumers ended Q3 on a strong footing, even as spending momentum softened late in the quarter. Real consumer spending was flat in September but rose at a 3.8% annualized pace over the quarter—matching the gain in Q2. A resilient labor market and strong household wealth supported consumption, but high energy prices are chipping away at purchasing power. Real income failed to grow for a second consecutive month, while the saving rate continued to decline. Together with higher borrowing costs, these headwinds are likely to weigh on consumer demand in the coming quarters.
The inflation outlook has become more concerning. Even as temperatures outside begin to drop, price pressures are showing signs of heating up. Elevated gasoline prices are keeping headline inflation hot, but underlying pressures are also broadening After trending lower through the summer, core PCE inflation re-accelerated amid a pick-up in prices for both core goods and services pushing three-month annualized rate to 2.9% (from 2.2% in August). Alongside firm economic activity, this renewed inflation momentum keeps another Fed rate hike in December firmly on the table.
