People shop in Macy's Herald Square ahead of Black Friday and Christmas in New York City, U.S., November 24, 2025. REUTERS/Kylie Cooper

By Lucia Mutikani

WASHINGTON, Dec 5 (Reuters) - U.S. consumer spending increased moderately in September after three straight months of solid gains, suggesting a loss of momentum in the economy at the end of the third quarter as a lackluster labor market and rising cost of living curbed demand.

The report from the Commerce Department on Friday also showed annual inflation rose at its fastest pace in nearly 1-1/2 years in September. President Donald Trump's sweeping tariffs on imported goods have raised prices for consumers, though the increase has been gradual.

Trump is taking heat from Americans frustrated over high inflation, with his approval rating declining in recent weeks. A survey from the University of Michigan said the overall tenor of households' views in early December was "broadly somber as consumers continue to cite the burden of high prices."

"Many consumers, especially middle- and lower-income households, face widespread affordability issues that force them to be more cautious and value-based shoppers," said Kathy Bostjancic, chief economist at Nationwide.

Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.3% after a downwardly revised 0.5% gain in August, the Commerce Department's Bureau of Economic Analysis said.

Economists polled by Reuters had forecast spending would advance 0.3% after a previously reported 0.6% rise in August. The report was delayed by the 43-day U.S. government shutdown.

The increase in spending reflected higher prices, particularly for gasoline and other energy goods. Outlays on motor vehicles, recreational goods and vehicles as well as other long-lasting manufactured products fell. Spending on clothing and footwear declined. Overall outlays on goods were unchanged.

Spending on services increased 0.4%, led by housing and utilities. Consumers also boosted spending on healthcare, financial services and insurance as well as hotel and motel rooms, and transportation services like airline tickets.

Stocks on Wall Street were trading higher. The dollar was steady against a basket of currencies.

HIGH-INCOME HOUSEHOLDS DRIVING SPENDING

Economists have attributed the increased spending on services to high-income households whose wealth was boosted by a stock market rally. Labor market stagnation has hurt middle- and lower-income consumers, who are also being squeezed by tariffs, economists said, creating what they called a K-shaped economy.

Wages increased 0.4% in September, helping to lift personal income by 0.4%. The saving rate was unchanged at 4.7%.

The Bank of America Institute said on Friday an analysis of internal data showed the gap between after-tax wage and salary growth of higher-income households and that of lower-income households remained large at 2.6 percentage points in November.

Economists at Goldman Sachs said in a note this week they expected weak income growth because of tepid job growth and cuts to government assistance programs like Medicaid and the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp program, to weigh on spending by low-income households in 2026.

"Unless one lives in the upper spur of the K-shaped economy it is easy to get the idea that, at best, down-market households are treading water at this time," said Joseph Brusuelas, chief economist at RSM US.

When adjusted for inflation, spending was unchanged after rising 0.2% in August, a weak handover to the fourth quarter.

Still, consumer spending likely grew at a brisk clip in the third quarter, underpinning the overall economy.

The Atlanta Federal Reserve is estimating gross domestic product increased at a 3.5% annualized rate in the July-September quarter. The economy grew at a 3.8% pace in the second quarter. Economists expect growth will slow sharply in the fourth quarter, also reflecting the drag from the government shutdown. The BEA will publish its delayed initial third-quarter GDP estimate on December 23.

The Personal Consumption Expenditures Price Index increased 0.3% in September, matching August's gain, the BEA said. In the 12 months through September, it advanced 2.8%. That was the largest year-on-year advance since April 2024 and followed a 2.7% rise in August.

Goods prices jumped 0.5% in September, pushed up by more expensive furnishings and durable household equipment as well as clothing and footwear, all likely related to tariffs. The prices of gasoline and other energy products soared 3.6%.

But prices for services rose by a marginal 0.2%, keeping underlying inflation under control. Excluding the volatile food and energy components, the PCE Price Index gained 0.2% after rising by the same margin in August.

In the 12 months through September, the so-called core inflation index increased 2.8% after rising by 2.9% for two straight months.

The U.S. central bank tracks the PCE price measures for its 2% inflation target. Economists said businesses were not done passing on higher costs from import duties to consumers, citing elevated price readings in recent Institute for Supply Management and S&P Global surveys.

Some economists said softer consumer spending and cooler core PCE inflation would allow the Fed to cut interest rates next Wednesday.

Financial markets put a roughly 87.2% chance on a 25-basis-point rate cut, CME Group's FedWatch tool showed.

"This likely bolsters the case for a rate cut if the focus stays on a weakening labor market amid moderate inflationary pressures," said Olu Sonola, head of U.S. economic research at Fitch Ratings.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)