Inflation of 3.7% is outrunning 3.0% pay growth while spending data hold up

Two numbers published in October frame the position of US households. Consumer prices rose 3.7% in the 12 months to September, according to the Bureau of Labor Statistics, while average hourly earnings rose 3.0% over the same period, according to the employment report. Pay is therefore growing more slowly than prices by 0.7 percentage point, a gap computed from the two published rates. Other data from the same weeks show spending still rising in dollar terms, a labor market with few layoffs but little hiring, and consumers who describe their finances as strained. This analysis sets those readings side by side and notes where the data do not explain the pattern.

Prices: energy sets the pace

The all-items index rose 0.6% in September, seasonally adjusted, after 0.4% in August, and the 12-month rate moved up to 3.7% from 3.4% in August. The gasoline index rose 9.1% in the month, which the BLS said accounted for more than half of the monthly increase. Over 12 months, energy prices are up 20.4% "due in large part" to gasoline, which is up 34.2%.

Outside energy and food the picture is calmer. Core consumer prices rose 0.3% in September, the same as in August, and 2.6% over 12 months, compared with 2.4% in the year to August. Shelter is up 3.2% over the year, and airline fares are up 22.4%. In other words, the headline rate of 3.7% is 1.1 points above the core rate, and the BLS attributes a large part of the 12-month rise in energy to one component, gasoline.

Pay: slower than prices

Average hourly earnings rose 5 cents, or 0.1%, in September to $37.81, which is 3.0% above a year earlier. Against a 3.7% rise in consumer prices, that leaves the average hourly wage lower in purchasing power than a year ago, on these two published figures. The employment report does not adjust earnings for prices, so the comparison is the desk's own arithmetic and covers the average across all private employees, not any single household.

Jobs: few cuts, little hiring

Payrolls grew by 29,000 in September, after an average monthly gain of 45,000 over the prior 12 months, and the unemployment rate was 4.2%, within the range of 4.1% to 4.3% in which it has stayed since March. The report also lowered earlier months: July was revised from a gain of 21,000 to a loss of 10,000 and August from 162,000 to 133,000, a combined 60,000 lower.

Layoffs, by contrast, remain low. The Labor Department's weekly report put initial jobless claims at 194,000 in the week ended October 17, down 6,000 from a revised 200,000 the week before. By the desk's computation of the weekly series, no reading has been lower than 194,000 since the week ended July 18, when claims were 189,000. Low claims and slow hiring are consistent with each other: the data show that few people are losing jobs, but they do not show how easy it is to find a new one.

Spending: higher in dollars, uneven underneath

Retail and food services sales were $745.0 billion in September, up 0.8% from August and 6.3% from September 2025, according to the Census Bureau. The Census Bureau notes that the figures are adjusted for seasonal variation and holiday and trading-day differences but not for price changes, so part of the increase reflects higher prices.

The composition matters. Sales at gasoline stations rose 6.4% on the month and 28.1% on the year. Excluding gasoline stations, total sales rose 0.2% on the month and 4.5% on the year. Restaurants and bars were stronger, with sales of food services and drinking places up 1.1% in the month and 7.0% on the year. The data show that a large part of September's monthly gain came from fuel, which is a price effect as much as a volume effect; they do not separate the two.

Sentiment: purchasing power dominates

The University of Michigan's final October survey put consumer sentiment at 48.0, against 48.1 in September and 53.6 a year earlier, a decline of 10.4% over the year. The survey's report said that "purchasing power continues to dominate consumer views of the economy" and that sentiment is 15% below its February level, just before the Iran conflict. The survey attributed the fall in current conditions to buying conditions for durable goods, which plunged 18% "on the basis of higher interest rates and rising concerns about the affordability" of purchases.

Inflation expectations are rising alongside. Year-ahead expectations edged up from 4.6% to 4.7%, and long-run expectations from 3.4% to 3.5%; both were at their highest since May.

Rates: the Fed has been raising

The Federal Reserve raised its target range by a quarter point to 3.75%-4.00% on September 16, in a 12-0 vote. In the minutes, most participants judged that another increase would likely be appropriate by the end of the year. The Fed meets again on October 27-28. That sets the backdrop for the "higher interest rates" cited by the Michigan survey: households face prices rising faster than pay at the same time as borrowing costs are higher. The sources do not establish how much of the weakness in durable-goods buying comes from rates and how much from prices.

Europe and Britain

The picture is not only American. The European Commission's flash estimate put euro area consumer confidence at -17.9 in October, down 1.1 points, and the European Central Bank, whose deposit rate was raised to 2.50% on September 16 after a rise in June, meets on October 28-29. In Great Britain, retail sales volumes fell 0.4% in September after a 0.7% rise in August, according to the Office for National Statistics. These are different measures from the US figures and cannot be added to them; they show that weak confidence and mixed spending are present on both sides of the Atlantic.

What to watch

Three releases will test the pattern. The Fed and the ECB decide on rates on October 27-28 and October 28-29. The BLS publishes October employment data on November 6 and consumer prices on November 10, both at 8:30 a.m. Eastern. If gasoline prices keep falling, the 3.7% rate would have less energy in it; if wages accelerate, the 0.7 point gap would narrow. Neither outcome is shown in the data published so far.