US GDP jumps 3.4% while inflation climbs to 3.6%: last economic snapshot before midterms
Web StoryWatch this story in 15 seconds →Key takeaways
- US GDP grew 3.4% in Q3, up from 2.2% in Q2, beating the 3.1% forecast.
- PCE inflation rose to 3.6% in September, well above the Fed's 2% target.
- The Fed held rates at 3.75% to 4% on October 28, and markets now see an 84.6% chance of a hike in December.
The US economy grew fast this summer and prices rose fast too. The Commerce Department reported both numbers on Thursday, October 29.
Growth hit 3.4% in the third quarter. Inflation hit 3.6% in September. This is the last major economic report before the midterm elections on November 3.
What happened
Two big numbers came out on the same morning. Both came from the Commerce Department's Bureau of Economic Analysis, or BEA.
The first number was GDP for the third quarter. The second was the PCE price index for September.
GDP stands for gross domestic product. It measures the total value of all goods and services the economy produces.
In Q3, real GDP grew at a 3.4% annualized rate. That is a big jump from 2.2% in the second quarter. It also beat the 3.1% forecast cited by CNBC, according to Marketspeaker.
The word "annualized" needs a quick explanation. The economy grew 0.8% from Q2 to Q3.
If it kept growing at that pace for a full year, growth would reach 3.4%. That is what annualized means.
Three things pushed growth higher. Businesses built up inventories and bought equipment, including computers.
Consumers kept spending. Government spending rose too. Exports fell while imports rose, which pulled growth down a little.
PCE stands for personal consumption expenditures. It is a price index.
It tracks what Americans pay for goods and services. It is also the Fed's favorite inflation measure.
The headline PCE index rose 0.5% from August to September. Over 12 months, inflation reached 3.6%.
That is up from 3.4% in August. The Fed's target is 2%. So inflation is running well above target.
Core PCE strips out food and energy. These prices jump around, so core shows the trend.
Core rose 0.3% for the month and 3.1% for the year. That is up from 3.0% in August.
Gasoline was a big driver of the September increase, Reuters reported. When fuel costs rise, they push the whole index up.
Why it matters
Strong growth plus high inflation is a hard mix for the Federal Reserve. Growth says the economy can handle higher rates.
Inflation says prices need cooling. The Fed must pick its move.
The Fed had just made its call one day earlier. On October 28, it voted 10 to 2 to hold rates at 3.75% to 4%.
Governor Lisa Cook and Cleveland Fed President Beth Hammack wanted a quarter-point increase instead. The new data landed after that vote.
Fed Chair Kevin Warsh told reporters the bank is watching energy prices. "Our job is to ensure that relative price changes in some sectors do not broaden out across the economy," he said, according to Reuters.
The spending numbers show why households may not feel the boom. Consumer spending rose 0.5% in September in dollars.
But after adjusting for prices, spending was flat. People spent more money and got no extra goods or services.
Personal income grew just 0.2% in September. The personal savings rate fell to 3.8% of disposable income. Americans saved less because prices ate more of their pay.
One measure looked stronger underneath. Real final sales to private domestic purchasers grew 4.9% in Q3.
This combines consumer spending and private investment. It shows that domestic demand, not just trade swings, drove growth.
The jobs picture stayed calm. Initial jobless claims fell to 194,000 for the week ended October 24. Low claims mean few people filed for unemployment benefits.
What happens next
All eyes turn to December. Financial markets now expect a rate hike next.
The odds are 84.6%, according to CME's FedWatch tool. That would take rates above 4%.
The economy also faces the midterm elections on November 3. Inflation and prices are top concerns for voters.
This GDP report is the last economic snapshot before election day. Five days after the numbers, Americans vote.
More data arrives on November 25. The BEA will release October income and spending figures.
It will also publish the second estimate of third-quarter GDP. That number could revise the 3.4% figure up or down.
One thing is clear from Thursday's reports. Growth is strong, but households are not fully sharing it.
Spending is up only in dollars, not in real terms. Inflation is still far from the Fed's 2% goal. The next move belongs to the central bank.
This article is for information only and is not financial advice.
US inflation was already running hot when the September CPI report arrived earlier this month.
Rising prices also hit pay. Read our explainer on the 2027 COLA increase. Anyone wondering why deposits earn less can see why savings account rates change.
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