U.S. Economic Growth Accelerates to 3.4% as Annual Inflation Rises in September
Key Facts
U.S. economic growth accelerated to an annual rate of 3.4% in the third quarter of 2026, compared with 2.2% in the second quarter, as annual headline personal consumption expenditures inflation rose to 3.6% in September from 3.4% in August. Data from the U.S. Bureau of Economic Analysis showed that the core price index, which excludes food and energy, rose 0.3% in September, compared with a 0.5% increase in the headline index. The figures put strong economic activity alongside price pressures, after the Federal Reserve left interest rates unchanged at its meeting on Oct. 27 and 28. Chair Kevin Warsh said, "That is not the judgment of most of my colleagues," in response to the characterization of the economy as growing excessively strongly. Warsh said growth does not automatically mean rising inflation, while the Federal Open Market Committee said activity was expanding at a strong pace and inflation remained elevated.
The inflation picture differs depending on the comparison period used: while the core index rose 3.1% year over year in September, its annualized growth slowed to 2.5% in the third quarter from 3.3% in the second quarter. The quarterly figure measures the pace of change during the quarter and converts it to an annual rate, while the 3.1% reading compares the price level in September with its level a year earlier. By contrast, the headline personal consumption expenditures index rose 3.6% year over year in September, up from 3.4% in August. The Associated Press attributed much of the inflation increase to higher gasoline prices. The agency linked the rise in fuel to renewed violence in the Middle East and oil prices remaining above $100 a barrel, making energy a factor in September's acceleration.
On the activity side, consumer spending rose at an annual rate of 3.8% in the third quarter, matching the pace of the second quarter and marking a second consecutive quarter of strong growth, according to the Associated Press. Real final sales to private domestic purchasers also increased 4.9%, compared with 4.6% in the second quarter; this measure includes consumer spending and private fixed investment. The Bureau of Economic Analysis said accelerating investment and a shift in government spending to an increase were the main factors behind the acceleration in GDP. Consumer spending contributed to growth, while a decline in exports limited the increase. These components reflect continued strength in domestic demand during the quarter, even as annual inflation accelerated and the quarterly core inflation reading eased.
Business spending on equipment stood out among investment components, rising at an annual rate of 20.9% in the third quarter and adding 1.16 percentage points to GDP growth, the largest contribution from this category in six years, according to a Reuters report published via Investing.com. By contrast, imports jumped at an annual rate of 19.7%, subtracting 2.64 percentage points from GDP growth. Rebuilding inventories offset part of that impact, contributing 1.61 percentage points. Government spending rose at an annual rate of 5.3%, with a sharp rebound in federal defense and nondefense outlays. These components show that the overall GDP growth rate combined varying contributions from investment, trade, government spending and inventories.
In markets, U.S. stocks fell in the Oct. 29 session, while the dollar declined against a basket of currencies and Treasury yields fell, according to Reuters via Investing.com. The Associated Press said the S&P 500 lost 0.3%, while the Nasdaq fell 1.4% and Treasury yields declined. The agency noted that a record drop in Alphabet weighed on the market. Economists said, according to the Reuters report, that strong growth alongside accelerating and broadening inflation in September strengthened the case for a rate hike in December. FactSet survey forecasts had pointed to GDP growth of 3% in the third quarter, before the release of the first estimate of 3.4%.
The Bureau of Economic Analysis is scheduled to publish its second estimate of third-quarter GDP growth and corporate profits on Nov. 25, along with October data on personal income and spending. The releases will provide an update on activity and prices following the September figures and the first GDP estimate. The GDP release is due at 8:30 a.m. Eastern time, according to the bureau's schedule. October personal income and spending data are also due at the same time. These are the next releases on the official calendar following the Fed meeting in late October.