The Federal Reserve's preferred inflation gauge rose further away from the central bank's target in September as consumers face price pressures.

The Commerce Department on Thursday reported that the personal consumption expenditures (PCE) index rose 0.5% on a monthly basis in September and was up 3.6% from a year ago. Both figures were in line with the expectations of economists polled by LSEG.

Core PCE, which excludes volatile measurements of food and energy prices, was up 0.3% on a monthly basis and 3.1% year over year. Those figures were both in line with economists' expectations.

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Federal Reserve policymakers are focused on the PCE headline figure as they try to bring inflation back to their long-run target of 2%, though they view core data as a better indicator of inflation.

Compared with August's readings, headline PCE ticked up from 3.4% to 3.6%, while core PCE rose from 3% to 3.1%.

Goods prices were up 3.9% year over year, while services prices increased 3.5% from a year ago in September.

The personal savings rate as a percentage of disposable personal income was 3.8%, down from 4% in August. Over the last two years, the savings rate has declined from a peak of 6.2% in April 2025 and from 5.6% in January 2026.

While inflation moved further away from the Fed's 2% target, the Commerce Department also released the advance estimate for third-quarter gross domestic product (GDP), which grew more than expected.

The Bureau of Economic Analysis estimated that third-quarter GDP was 3.4%, above the 3.2% estimate of economists polled by LSEG. The BEA will release two subsequent revisions of the third-quarter GDP data.

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What experts are saying

Bret Kenwell, U.S. investment analyst at etoro, said that "today's in-line PCE report offered little in the way of surprise. But the lack of a shock does not mean the lack of a problem: Both headline and core PCE rose to their highest levels since May, underscoring that inflation remains a stubborn issue."

"The bright spot was the third-quarter GDP report, which showed 3.4% annualized growth and came in slightly ahead of expectations. Personal consumption led the way, while federal government consumption reached its highest level in at least five years," Kenwell said. "The report confirms that demand remains resilient, even if it does little to ease the inflation pressure tied to that demand."

James McCann, senior economist for investment strategy at Edward Jones, said that the "seemingly indefatigable U.S. consumer and a nascent AI investment boom continue to drive the U.S. economy, with growth running well above trend."

"Admittedly there are some headwinds incoming, which should cool activity rates a little towards the end of the year as oil prices spike and financial conditions tighten. However, the economy looks in good shape, which might make investors question again why the Fed did not raise rates yesterday, especially with PCE moving further above the Fed's target to 3.6% in September," McCann said.

He added that while "Chair Warsh was reluctant to provide strong signals at the FOMC meeting yesterday, a bullish tone on growth, dissents in favor of a hike and the message that financial conditions were not tight all point to a return to tightening in December and potentially one more interest rate hike in 2027, in our view."

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What does it mean for the Fed and interest rates?

The market continues to expect the Fed to hike interest rates by 25 basis points in December, which would bring the federal funds rate to a range of 4% to 4.25% once implemented.

The CME FedWatch tool shows a 79.6% probability the Fed will hike by 25 basis points in December, down slightly from 84.2% yesterday but higher than the 73.3% probability a week ago.

What did it mean for the market?

The benchmark S&P 500 Index declined more than 0.4% after the market opened on Thursday morning.

The Dow Jones Industrial Average was down over 0.3%, while the Nasdaq Composite slid more than 1.4%.