Despite inflation picking up speed once again in September 2026, Americans continue their spending habits. However, experts caution that the endurance of consumers has its limits.
A report from The Associated Press reveals a puzzling economic landscape: prices are climbing, consumers keep spending, yet their wallets are shrinking with each passing month.
Inflation's Persistent Climb
The Consumer Price Index (CPI) saw an increase to 3.7% year-over-year in September, up from 3.4% in August, according to the Bureau of Labor Statistics. Energy, particularly gasoline, is largely to blame, with gas prices surging 9.1% in just one month. This accounted for over half of the month's CPI rise, which went up 0.6% from August to September, marking the largest monthly increase in five months.
Additionally, core inflation—which excludes food and energy—also ticked upward from 2.4% to 2.6% year-over-year, indicating that price pressures are not confined to the energy sector alone.
Diesel: A Hidden Driver of Economic Strain
Following gasoline, diesel is a major concern for economists due to its domino effect on the entire economy. Producer prices recorded their most significant monthly jump since 2022, with the Producer Price Index increasing by 1.3% monthly and 6.3% year-over-year in September. Wholesale diesel prices skyrocketed 21% in a single month.
The average retail price of diesel reached $6.32 per gallon by mid-October, as reported by the American Automobile Association (AAA), nearly double the $3.66 from a year ago.
"The shock in transportation prices affects all goods in the economy, as manufacturing inputs are transported to factories and goods at all production stages move from producer to wholesaler and retailer by truck, train, or rail," explained Carl Weinberg, chief economist at High Frequency Economics, in an AP interview.
"This is how energy price increases 'trickle down' to underlying goods prices," he added.
Wholesale food prices rose 1.2% in September, the largest increase since February, and farmers—who also rely on diesel for their machinery—anticipate further hikes in the coming months.
Consumer Spending Continues Amid Discontent
Despite these challenges, retail sales climbed a solid 0.8% in September compared to August, beating economists' forecasts. However, the details reveal a different story: spending at gas stations surged 6.4%, and excluding gasoline, sales barely rose 0.2%.
"Consumers may have gritted their teeth and overlooked higher gasoline prices," noted Jim Baird, chief investment officer at Plante Moran Financial Advisors, in a statement to AP.
"They're not happy, but they're still spending," he added.
This resilience is partly explained by the labor market. Unemployment claims remained below 200,000 last week, a historically low figure. However, warning signs are emerging: the economy added only 29,000 jobs in September, far below the expected 90,000, and the unemployment rate ticked up slightly to 4.2%.
Furthermore, inflation-adjusted weekly paychecks fell in September compared to the previous year for the first time since May, indicating that workers are losing real purchasing power.
"If the unemployment rate remains low, meaning consumers are employed, they will continue to spend, albeit more cautiously and increasingly relying on savings and credit," warned Kathy Bostjancic, chief economist at Nationwide, in a statement to AP.
The Federal Reserve's Tightening Grip
The Federal Reserve raised its benchmark rate in September for the first time since 2023, to a range of 3.75%-4.00%. Meeting minutes revealed that 16 of 18 officials are considering at least one more hike before the year's end, which would further raise the cost of mortgages, car loans, and credit cards.
The 30-year mortgage rate had already reached 7.46% by mid-October, up from 5.99% in February, complicating homebuying for millions of families.
The upcoming CPI report for October, scheduled for November 10, will be a critical indicator of whether the economy can turn the inflationary tide or if consumers will finally start to buckle under the pressure.
Understanding Inflation and Consumer Spending in the U.S.
What factors are contributing to the recent acceleration in inflation?
Energy prices, particularly gasoline, are major contributors, with significant price increases noted in the sector. Additionally, diesel prices have had a cascading effect on the overall economy.
How are consumers managing to continue spending despite rising prices?
The strong labor market, with unemployment claims remaining low, supports consumer spending. However, consumers are increasingly relying on savings and credit to maintain their purchasing habits.
What impact does the Federal Reserve's rate hike have on consumers?
The rate hike increases the cost of borrowing, affecting mortgages, car loans, and credit card interest rates, which in turn can limit consumer spending power.