US Consumer Spending Holds Up as Inflation Climbs to 3.7%

Shoppers keep spending as the cushion under them thins

American consumers are still spending in the fall of 2026, even as inflation picks up again, hiring stalls and wages fall behind prices. September's data show demand holding steady while the household finances behind it grow weaker. That gap is the central question as Washington heads into a busy stretch: the advance estimate of third-quarter GDP and the September personal spending report, both due October 29, followed less than a week later by the November 3 midterm elections.

The spending numbers are strong. The Commerce Department's measure of consumer spending, personal consumption expenditures, jumped 0.9% in August after a 0.1% gain in July. The next release is scheduled for October 29.1 Retail sales rose 0.8% in September, about twice what forecasters expected. That was slower than August's 1.3% gain but still solid.8 The National Retail Federation expects Americans to spend $1 trillion at retailers in November and December, a 4.2% increase over 2025.8

Bank card data point the same way. Bank of America reported that credit and debit card spending per household rose 6.2% from a year earlier in September, or 5.1% excluding gasoline. Both were the third-fastest growth rates in four years.4 The bank also said month-over-month spending was flatter, rising 0.2% overall and staying about unchanged without gas.7 That detail matters: a good share of the yearly gain comes from higher prices at the pump rather than more buying.

Inflation re-accelerates, and it is not only about gasoline

The September consumer price index showed prices up 0.6% for the month and 3.7% from a year earlier, compared with 3.4% in August. Economists had expected 3.6%.11 Gasoline rose 9.1% in one month and accounted for more than half of the increase.12 Gas prices are now up 34% over the year, and the broader energy index is up 20.4%.14 The main cause is the war with Iran, which has squeezed global oil supply since late February.14 One analysis ties the continued energy pressure to the ongoing closure of the Strait of Hormuz.18

Forecasters agree that energy drove the headline number. They disagree about how much the rest of the report should worry the Fed. Core CPI, which excludes food and energy, rose 0.3% for the month and 2.6% for the year, both a little above estimates.11 TD Economics noted that the three-month annualized core rate climbed to 3.4%. It also found price increases across shelter, core goods and several services, and concluded that the Fed probably cannot stay on hold much longer.19 Carson Group's Sonu Varghese argued that core prices were running at a 3.7% annualized pace in September.11 A more measured reading notes that excluding energy entirely, annual inflation is 2.6%, and that gasoline alone adds about 1.1 percentage points to the headline rate.20

The hawkish reading looks stronger here. An energy shock that lasts this long tends to spread into airfares, shipping and other services, and TD Economics warned of exactly that risk.19 The Cleveland Fed's nowcast expects headline CPI to rise slightly to about 3.77% in October, and core PCE, the Fed's preferred measure, to edge up from a steady 3%.18 Economists also cited tariffs, construction of AI data centers and strong demand for travel as sources of upward price pressure.12

The pressure is reaching households directly. Social Security recipients will get a 3.6% cost-of-living increase for 2027, based on the September data.14

A labor market losing steam

If inflation were the only issue, the Fed's next step would be easy. The October 2 jobs report makes it harder. Employers added only 29,000 jobs in September, against a forecast of about 84,000. Unemployment rose to 4.2%.31 Revisions lowered the July and August totals by a combined 60,000. July now shows a net loss of 10,000 jobs.31

The details are mixed. Some economists said the higher unemployment rate came partly from good news: about half a million more people looked for work, and labor force participation rose to 61.8%.37 A broader measure of underemployment fell to 7.6%, its lowest since January 2025.31 On the negative side, unemployment among Black workers rose a full percentage point to 7%.33 White-collar sectors such as information, finance and professional services lost jobs.39

Wages are the weakest part of the report for consumers. Average hourly earnings rose only 0.1% in September and 3.0% over the year.35 With CPI at 3.7%, real hourly earnings are down 0.7% from a year earlier.39 Several outlets reached the same conclusion: the job market is not collapsing, but it is no longer producing raises that keep up with the cost of living.3338

How spending outruns income

If real wages are falling, how are households still spending? One research analysis estimates that inflation-adjusted spending is up 2.6% from a year ago, while real disposable income is up only 1.3%. People are covering the gap by saving less and borrowing more.6 The same analysis puts the personal saving rate at 4.1%, compared with a 2019 average of 7.3%. It also reports revolving credit balances of about $1.35 trillion at an average card rate above 21%.6 Its core argument is that a K-shaped economy has developed: households with assets, whose net worth has risen sharply, are carrying overall spending, while wage earners fall behind.6

The Federal Reserve's October Beige Book, a survey of business contacts, supports that view. Most of the 12 Fed districts reported little or no change in consumer spending. More than half said high-income households were driving purchases.5 The Cleveland Fed reported flat spending after four straight periods of decline. Retailers there blamed high fuel prices, and auto dealers described customers spending "the bare minimum" on maintenance.10

Bank of America's data tell a somewhat different story. In September, card spending among lower-income households grew 5.5% year over year, faster than for middle- and higher-income groups and behind only the top 5%. Gaps between income groups were much smaller than in 2025.7 The bank does see some signs of strain. Buy-now-pay-later use is rising, and almost one in five households using it has a repayment above $500. The bank describes the trend as not yet alarming.7 Deloitte's consumer survey found that discretionary spending intentions rose for a second straight month to their highest level since January.2

The two pictures can be reconciled. Card data measure dollars, and dollars rise with prices. Beige Book contacts describe volume, and volume looks flat. Bank of America itself acknowledges that higher prices explain part of the increase, though it says counts of transactions show a similar trend.7 On balance, spending in late 2026 is broad but shallow. It is supported by a low saving rate and by wealth gains at the top more than by rising paychecks.

GDP: a strong domestic engine, distorted by trade

This is why the October 29 GDP release matters so much. Second-quarter growth was revised to 2.2% annualized, and first-quarter growth was revised up to 2.5%.27 Estimates for the third quarter vary widely. The Atlanta Fed's GDPNow model was at 3.7% in early October21, slipped to 3.6% by mid-month22 and stood at 3.5% on October 20.27 A median of several nowcasts compiled by The Capital Spectator was 3.2%.26 Continuum Economics expects 2.8%.25 Atlas Analytics, which builds its estimates from satellite data, is at the low end with 1.5%.23

Trade accounts for most of that spread, not consumers. Continuum expects imports to surge 18.7% as AI-related investment pulls in foreign equipment. It projects net exports will subtract 3.4 percentage points from growth, while inventories add 2.4 points.25 Atlas likewise finds healthy domestic activity hidden by a wider trade deficit.23 On consumers, the forecasts mostly agree. Continuum projects real consumer spending growth of 3.4%, down slightly from 3.8% in the second quarter.25 GDPNow's consumption estimate was close to that level in early October.21

Business investment is the other main support. Continuum expects AI-related capital spending to rise about 9.6%.25 U.S. Bank describes consumer spending and business investment as the economy's two main drivers.27

What it means for the Fed and for households

The Fed is in a difficult spot. It has already raised rates this year to fight inflation and projects 2.3% GDP growth for 2026.27 Before the CPI report, the weak jobs numbers had pushed markets toward expecting the Fed to hold steady in October.31 After the CPI report, the odds of an October hike rose sharply.19 Most policymakers still expect one more increase this year, and markets are pricing in possibly two more in 2027.11

The most likely outcome is that third-quarter GDP looks strong because of consumers and AI investment, and that this strength is used to justify keeping policy tight. The cost would fall unevenly. Households with investment portfolios can absorb $4-plus gasoline and 21% credit card rates. Households living on paychecks that grow 3% while prices rise 3.7% are drawing down savings and borrowing more. The aggregate spending numbers remain strong for now, but they rest on a smaller group of households and on borrowing, and the labor market will decide how long that lasts.