New economic data from the United States paints a picture of consumers still grappling with the persistent burden of high prices as the crucial holiday shopping period gets underway. Reports on consumer pricing and sentiment released on Friday highlight ongoing affordability concerns.
Key Inflation Data Shows Persistent Pressure
The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed an annual increase of 2.8 percent in September. This was a slight uptick from the 2.7 percent recorded in August. When volatile food and energy costs are excluded, the core PCE index also stood at 2.8 percent for September, which was a minor improvement from August's 2.9 percent reading.
This mixed report, which was delayed due to a recent US federal government shutdown, is the last major inflation snapshot before the Federal Reserve's upcoming interest rate decision. While the figures largely matched economist forecasts, they contained worrying signs for household budgets. Notably, the cost of durable goods such as cars, appliances, and furniture jumped by 1.4 percent compared to a year ago.
Consumer Sentiment Remains Broadly Somber
A separate survey from the University of Michigan indicated a slight improvement in consumer sentiment, with the index rising to 53.3 in December from 51.0 in November. However, the underlying outlook remains cautious.
Survey director Joanne Hsu noted that consumers now have a more pessimistic view of their expected personal income compared to early 2025. Expectations for the labor market also "remained relatively dismal." Hsu stated that while there were modest improvements from November, "the overall tenor of views is broadly somber, as consumers continue to cite the burden of high prices."
Federal Reserve's Delicate Balancing Act
The latest data did not cause significant movement in US stock markets on Friday. Stocks have seen modest weekly gains, partly driven by expectations that the Fed will cut interest rates at its next meeting. The central bank has already reduced rates at its last two gatherings in response to signs of a cooling employment market.
However, policymakers remain vigilant on inflation, particularly due to risks that former President Donald Trump's tariff policies could trigger another major price surge. Gregory Daco, Chief Economist at EY-Parthenon, predicts the Fed will proceed with a rate cut but could face internal disagreements.
Daco expects Fed Chair Jerome Powell to "persuade several hesitant policymakers to support a third consecutive 'risk management' rate cut," while signaling that further easing is unlikely before spring unless the economy weakens substantially. Daco also warned that the pass-through of tariff costs to consumer goods has been "gradual and uneven," worsening the affordability crisis. He anticipates rising inflation in late 2025 and early 2026, further complicating the consumer outlook as the job market softens.
