US inflation accelerated in September, while economic growth exceeded expectations in the third quarter and jobless claims remained near multi-decade lows, presenting the Federal Reserve with a challenging policy outlook.

The personal consumption expenditures (PCE) price index, the central bank’s preferred inflation gauge, increased 0.5% month-on-month on a seasonally adjusted basis, taking the annual rate to 3.6%, according to Commerce Department data released Thursday.

The monthly increase matched the Dow Jones consensus forecast, while the annual rate was 0.1 percentage point below expectations.

Core PCE inflation, which excludes volatile food and energy prices, rose 0.3% from the previous month and 3.1% annually.

Both readings were in line with economists’ forecasts.

Fed officials generally view core inflation as a better indicator of longer-term price pressures, although they monitor both measures.

Inflation remains significantly above the Fed’s 2% target, even as the economy continues to demonstrate resilience.

Economic growth exceeds expectations

The Commerce Department report showed that US gross domestic product increased at a seasonally adjusted annualised rate of 3.4% in the third quarter, beating the 3.1% estimate and accelerating from 2.2% growth in the second quarter.

Consumer spending, a key driver of the US economy, increased 0.5% in September, slightly below the 0.6% gain forecast by economists.

Personal income rose 0.2%, compared with expectations for a 0.3% increase.

The combination of firm economic growth and persistent inflation could make it harder for policymakers to justify easing monetary policy in the near term.

The data arrived a day after the Federal Reserve held its benchmark interest rate in a range of 3.75%-4.00%.

Officials have said they can assess incoming economic information before deciding on their next move, despite inflation remaining elevated.

“The period right in front of us is information rich. There is a lot that’s happening in the world. My colleagues and I are keen to take notice of it,” Fed Chairman Kevin Warsh said.

Thursday’s figures, however, suggest that policymakers may have more work to do to bring inflation under control while sustaining economic growth.

Jobless claims remain near historic lows

Separate Labor Department data showed that initial claims for state unemployment benefits fell by 1,000 to a seasonally adjusted 194,000 in the week ended October 24.

Economists polled by Reuters had expected 199,000 claims.

Claims have remained mostly below 200,000 since mid-September and are close to the 189,000 recorded in mid-July, the lowest level since 1969.

Economists describe the labour market as being in a “low-hire, low-fire” state, with resilient domestic demand and strong corporate profits helping keep layoffs near historic lows.

However, the ongoing US-Israeli war with Iran has made employers more hesitant to expand their workforces.

Continuing claims, which track people receiving unemployment benefits after an initial week of aid, fell by 21,000 to a seasonally adjusted 1.701 million in the week ended October 17.

The measure covers the period in which the government surveyed households for October’s unemployment rate.

The US unemployment rate stood at 4.2% in September and could remain steady or edge lower in October.

A Conference Board survey released Tuesday showed consumers had become more optimistic about labour market conditions.

A shrinking labour force amid the Trump administration’s immigration crackdown has also helped keep the unemployment rate low.

Warsh acknowledged the labour market’s stability after Wednesday’s policy decision, telling reporters that “on the employment side of the Fed’s dual mandate, conditions are quite positive.”

With inflation still elevated, growth stronger than anticipated and layoffs subdued, economists expect the Federal Reserve to raise rates in December.

The latest data underline the challenge facing policymakers as they weigh price stability against the risks of keeping monetary policy restrictive for too long.

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