Consumer Spending Holds Up as CPI Hits 3.7% and Yields Whipsaw

A hot week for prices, and the consumer kept spending

One mid-October week showed the main tension in the U.S. economy. Prices are rising faster again. Shoppers are still spending. Growth is running above trend. The bond market could not decide whether the bigger danger was inflation or a pullback in risk assets.

The Bureau of Labor Statistics said the consumer price index rose a seasonally adjusted 0.6% in September, up from 0.4% in August. That took the annual rate to 3.7%, from 3.4%.31 Gasoline rose 9.1% in the month and accounted for more than half of the overall increase. The energy index is now up 20.4% from a year earlier.31 A day later, the Commerce Department's advance estimate showed retail and food services sales up 0.8% in September to about $745 billion, which is 6.3% above a year earlier.2

Those two headline numbers make the economy look strong. The details are less flattering. Much of the spending went to paying higher prices, and much of the price increase came from a single, volatile source.

Inflation: energy-driven, but not only energy

All the major outlets agree on the basic numbers. Headline CPI beat the 3.6% consensus. Core CPI, which excludes food and energy, rose 0.3% for the month and 2.6% for the year. Forecasters had expected 0.2% and 2.5%.323739 Core inflation was 2.4% in August, so the annual pace moved up for the first time since May.40

The reporting splits on how alarming this is. One camp treats September mainly as an energy shock. The New York Times tied the surge in fuel costs to the war with Iran, which has squeezed global oil supply since late February. It also pointed to knock-on effects such as higher airfares as jet fuel prices climbed.34 By one estimate, gasoline alone adds about 1.1 percentage points to the 3.7% annual rate.40

Other coverage stressed how widely prices rose. CNN said price pressures spread well beyond the gas pump. Core goods prices rose at the fastest pace since January 2025, and toy prices rose by a record 4.2% in a single month.37 Carson Group's Sonu Varghese noted that the monthly core gain works out to roughly 3.7% on an annualized basis. He argued investors keep being surprised by how broad inflation has become.32 The BLS release backs up that view: shelter rose 0.4%, and used cars, apparel, airline fares and medical care all moved higher.31

The broader reading looks more convincing. Core CPI is only modestly above target. But producer prices rose 6.3% from a year earlier in September, the largest annual increase since December 2022.19 That suggests more cost pressure is building in the pipeline. Price expectations also look less settled. Household one-year inflation expectations rose to 3.9% in September from 3.6%.33

Consumer spending: strong in dollars, weak after inflation

The retail sales report beat the 0.3% consensus by a wide margin, and August was revised up to a 1.3% gain.9 On the surface, that is a resilient consumer. But gas station sales jumped 6.4%. Excluding gasoline, sales rose only 0.2%.5 The control group, the measure that feeds directly into GDP, rose just 0.1% after a 1.2% gain in August.3 Oxford Economics' Michael Pearce said the jump in headline sales came almost entirely from higher gasoline prices.5

Adjusting for inflation makes the picture plainer. EY-Parthenon estimated that real retail sales rose only 0.1% in a month when nominal sales rose 0.8%.7 The Conference Board also put real retail sales at 0.1% for September.10 The two analyses differ on the quarter as a whole. The Conference Board says real retail sales grew at a 3.1% annualized rate in the third quarter and calls Q3 consumer spending healthy.10 Pearce likewise sees consumption on track for a 3.3% annualized gain, but expects momentum to fade before the holidays as higher prices weigh on households.5

The broader spending data look stronger. Personal consumption expenditures jumped 0.9% in August after a 0.1% gain in July.1 Real consumer spending was up 2.6% from a year earlier.4 That spending, however, is not being paid for by rising real incomes. FinzData calculates that real hourly wages are down 0.7% from a year earlier, with prices rising 3.7% and earnings 3.0%. The personal saving rate is 4.1%, compared with a 7.3% average in 2019.4 Business Insider noted that inflation has now outpaced wage growth for six straight months.36

The best summary is that spending in the third quarter was real, but households are drawing down savings and taking on credit to sustain it. FinzData describes this as a K-shaped pattern. Wealthier households that own stocks and homes are supporting aggregate demand, while wage earners save less and borrow at credit card rates near 21%.4 BDO's Natalie Kotlyar warned against treating the September numbers as proof of broad consumer strength. She argued that spending this strong cannot continue indefinitely when paychecks lag prices.59

GDP: a strong quarter, with caveats

Growth estimates show the economy picking up speed. After the October 15 data releases, the Atlanta Fed's GDPNow model held its third-quarter estimate at 3.6% annualized. It raised the consumption component from 3.4% to 3.6% and trimmed the contribution from inventories.21 For comparison, revised figures put first-quarter growth at 2.5% and second-quarter growth at 2.2%.21 The government's first official third-quarter estimate is due October 29.21

The GDPNow estimate has swung widely. It stood at 5.1% in mid-September.26 It fell to 3.7% at the end of the month after the August goods trade deficit came in far wider than expected.24 Inventories still account for roughly half of the current estimate.21 Inventory-driven growth tends to reverse once businesses stop stocking up, so the headline number may overstate how strong underlying demand is.

Cerity Partners argues that heavy data center construction is propping up growth and pulling manufacturing out of its slump.30 It says the wider trade deficit mainly reflects strong domestic spending on imports.30 The labor market is a weaker spot. A disappointing 29,000 jobs were added in September and the unemployment rate rose.5 That clashes with the stronger picture some analysts painted at the end of September.29 Weak hiring and falling real wages could slow consumer spending more than the GDP estimates currently suggest.

Treasury yields: up on inflation, down on the stock sell-off

The bond market reaction was the most surprising part of the week. The 10-year Treasury yield rose about 10 basis points to roughly 5.3% after the CPI report. That is close to levels last seen in early 2002.17 Reports of the exact peak vary between 5.31% and 5.33%.3619 Then the move reversed. Yields fell about 10 basis points on Thursday, the biggest one-day drop since August 2025.19 That happened even though producer prices were hot and retail sales beat forecasts.19

The reporting largely agrees on why. A sell-off in technology and AI-related stocks pushed investors into government bonds as a safe haven.1720 One account says major tech companies lost more than $1 trillion in market value in a single week.20 By Friday, the 10-year was around 5.07% to 5.10%.1116

Short-term yields tell a different story. Odds of a quarter-point Fed hike at the October 28 meeting rose from about 22% before the CPI report to as high as 58% intraday.1317 CME data showed the probability of at least one more hike before year-end above 95%.18 By Friday, the odds of an October move had fallen to about 16%, but December was priced at about 89%.16 Fed Chair Kevin Warsh disappointed some investors by offering no guidance on rates.16 Chicago Fed President Austan Goolsbee called the inflation figures discouraging.17

The drop in long-term yields does not mean inflation fears have eased. Rate-hike expectations actually strengthened during the week, while long-term yields fell on safe-haven buying.20 Investors have repeatedly bought bonds when the 10-year neared 5.3%, which suggests that level may be acting as a ceiling for now.19 Still, heavy Treasury issuance and worries about U.S. debt continue to push long-term yields up.12

What it means

The economy is growing faster than at any point this year. That growth is driven by AI-related investment, inventory building and consumers who are spending down savings. Rising energy prices are behind much of the inflation, but they are now feeding into core prices as well. The Fed, under Warsh, appears more likely to raise rates than to wait. September's numbers make a December hike close to a given in market pricing. The weak points are low-income households, a soft labor market and stock valuations that are vulnerable at 5% Treasury yields. The October 29 GDP release and the next round of spending data will show whether consumers can keep spending at this pace.