US consumer spending increased more than expected in September, keeping it on a higher growth path heading into the fourth quarter, while monthly inflation was elevated.

Consumer spending, which accounts for more than two-thirds of US economic activity, surged 0.7 per cent last month, the Commerce Department’s Bureau of Economic Analysis reported on Friday (Oct 27). Data for August was unrevised to show spending rising 0.4 per cent.

Economists polled by Reuters had forecast spending gaining 0.5 per cent. The data was included in the advance gross domestic product report for the third quarter published on Thursday, which showed consumer spending accelerating sharply, contributing to the fastest pace of economic growth in nearly two years.

While the robust rate of growth in consumer spending is likely unsustainable, the strong hand-off from the last quarter bodes well for spending in Q4 amid growing challenges. Consumer spending is being driven by solid wage growth from a tight labour market, as well as households drawing down on excess savings accumulated during the Covid-19 pandemic.

But the resumption of student loan repayments in October by millions of Americans could pressure household budgets and sap momentum. Low-income households are believed to have exhausted their excess savings and some are relying on debt to fund purchases, made expensive by higher borrowing costs.

Though credit card balances are rising, most economists do not believe that they are at levels that could cause alarm, and argue that the labour market remains the key factor for spending.

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The personal consumption expenditures (PCE) price index gained 0.4 per cent in September after increasing by the same margin in August. In the 12 months through September, the PCE price index advanced 3.4 per cent, matching August’s rise.

Excluding the volatile food and energy components, the PCE price index climbed 0.3 per cent, after increasing 0.1 per cent in the prior month. The so-called core PCE price index rose 3.7 per cent on a year-on-year basis in September. That was the smallest gain in more than two years and followed a 3.8 per cent increase in August.

The US Federal Reserve tracks the PCE price indexes for its 2 per cent inflation target. The Fed is expected to leave interest rates unchanged next Wednesday following a recent surge in US Treasury yields and stock market sell-off, which have tightened financial conditions.

Since March 2022, the central bank has raised its policy rate by 525 basis points to the current 5.25 per cent-5.50 per cent range. REUTERS