U.S. Week Ahead

Headline is expected to rise 0.5% m/m, with the y/y pace accelerating to 3.7%. There are a few reasons we expect core PCE to reaccelerate this month. First, within the September CPI data, we saw material price increases for imported goods including clothing, toys, and computers. Second, PPI for airfares, which feeds into PCE transportation services, registered 2.0% m/m compared to a 1.2% m/m increase in CPI airfares. Third, health care, which is included in PCE but not CPI, added to price pressures, particularly PPI for hospital inpatient care (up +0.3% m/m). As the Fed’s preferred measure of inflation, we expect the data will show a concerning trajectory. We do not expect the full extent of upside risks stemming from energy prices and tariffs to be captured in this report. Exceptionally high freight costs will likely continue to flow through to consumer prices with a lag.

We expect the Federal Reserve will hold interest rates steady in their October meeting. The uncomfortable reality is that the timing of future hikes will have little influence over the trajectory of inflation. Higher interest rates cannot solve supply-driven inflation, and they are not well-equipped to curb demand-driven impulses either when the bulk of demand comes from groups that are not particularly rate-sensitive: upper-income consumers and retirees. We expect to see additional hikes in the coming months but remain mindful that a higher rate environment would disproportionately harm lower- and middle-income households who are saving less and already facing a high personal interest expense burden.

For consumers, we expect personal spending to continue to rise, driven by upper income households and retirees. Our forecast calls for a 0.6% m/m increase, largely stemming from strong services spending and the effects of higher energy prices. Netting out the impact of inflation, real personal spending is expected to show a more modest 0.1% m/m rise. Still, with spending outpacing income growth (0.3% m/m), most consumers will be unlikely to maintain consumption growth in the months ahead, especially if energy prices remain elevated.

We also get Q3 Advanced GDP data and forecast 2.4% growth. We expect the bulk of growth will be driven by personal consumption and nonresidential capex tied to AI. Despite strong momentum from the aforementioned sectors, trade and inventories are expected to subtract from growth – a byproduct of the tariff environment. The 2025 Q1 inventory buildup has been drawn down for five consecutive quarters and we look for the remaining pre-tariff inventories to run out this year. While a re-stocking of inventories in 2027 is a tailwind for growth, it adds to inflation risk with the latest tariffs now in effect.

Five consecutive quarters of inventory drawdown has never occurred outside a recession

Consumer Spending and Business Investment slated to drive bulk of Q3 growth

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About the authors:

Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s US economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a Senior US Economist at RBC. She is responsible for generating RBC’s US economic forecasts across GDP, employment, and inflation, and providing macro commentary through publications, presentations, and the media.

Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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