Rising Inflation Still Leaves Room for Fed Rate Cuts
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Trusted Insights for What’s Ahead®

  • Rising inflation continues to have only a muted impact on consumer spending. Consumer spending has remained solid in Q3, supported by healthy growth in personal income. 

Rising Inflation Still Leaves Room for Fed Rate Cuts

September 26, 2025

Trusted Insights for What’s Ahead®

  • Rising inflation continues to have only a muted impact on consumer spending. Consumer spending has remained solid in Q3, supported by healthy growth in personal income. 

  • With two months of data for Q3, real consumer spending growth is running at 2.8%, higher than 2.5% in Q2, suggesting overall GDP growth will remain robust in the current quarter, following strong performance in Q2 (3.8% q/q SAAR).
  • However, consumer resilience will be tested during the holiday shopping season at the end of the year, as inflation will likely keep rising in the coming months.
  • Tariffs continue to nudge inflation higher, albeit slowly. In August, the headline Personal Consumption Expenditures (PCE) deflator increased to 2.7% y/y from 2.6% in the previous month thanks to broad-based price increases across both goods and services.
  • With inflation close to 3% and continuing to rise, monetary policy decisions will hinge heavily on labor market data, as the Fed continues to carefully navigate respective risks to inflation and employment.
  • We estimate GDP growth to slow below 1% q/q SAAR in H2 and inflation to rise above 3% by year-
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Author

Yelena Shulyatyeva

Yelena Shulyatyeva

Senior US Economist

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