Consumer Spending Rose in September

Overall consumer prices rose 6.2% in September from a year earlier, the same pace as in August and near a 40-year high, according to the Federal Reserve’s preferred inflation measure, the personal-consumption expenditures price index.

The gap between Americans’ incomes and outlays widened in September, a sign that households are strained by rising prices despite a strong labor market. Americans’ incomes were flat when factoring in price changes, a worsening from August when they rose 0.2%, and their inflation-adjusted spending increased a more modest 0.3%.

“I think the consumer backdrop is slowing but still strong,” said Wilmington Trust’s Chief Economist Luke Tilley, noting that many consumers have spent down the savings they accumulated thanks to fiscal stimulus during the pandemic.

The personal saving rate, a measure of how much money people have left over after spending and taxes, fell to 3.1% from 3.4% in August. It is down from 7.9% a year ago as consumers tap their rainy-day funds.

U.S. credit-card balances hit $916 billion in September, returning to prepandemic levels, credit-reporting firm

Equifax Inc.

said. Balances are up 9% from January and about 23% higher than their pandemic low in April 2021.

A closely watched reading of underlying inflationary pressures, meanwhile, picked up last month and remained near a four-decade high. When stripped of volatile food and energy prices, the PCE price index strengthened to a 5.1% year-over-year increase—the strongest pace since March.

Friday’s report comes on the heels of other data showing consumers’ momentum weakened in the summer months. Consumer spending accounts for roughly two-thirds of total U.S. economic output.

On Thursday,

Amazon.com Inc.

projected sales in the current quarter would be far below expectations. Amazon’s massive retail business, which now generates more than $350 billion in annual sales, is particularly exposed to consumers across the globe who are seeing their spending power crimped by rising inflation.

Consumers’ outlook for the U.S. economy improved slightly in October but remained at a relatively low level amid concerns about inflation, according to a final reading from the University of Michigan’s sentiment index.

“Given consumers’ ongoing unease over the economy, most notably this month among higher-income consumers, any continued weakening in incomes or wealth could lead to further pullbacks in spending that would reinforce other risks of recession,” said Joanne Hsu, director of the surveys of consumers.

Tyler Lahti, an accountant living in Smyrna, Ga., said he is noticing inflation creeping into day-to-day expenses. Instead of going out for dinner, he and his girlfriend typically go out for drinks instead and cook food at home.

The 32-year old switched to a higher-paying job this spring and locked in low interest rates when he bought a car in 2020 and a house in 2021. Still, he said he has started buying $90 running sneakers instead of $160 ones to save money.

“I don’t buy beer at the ballpark any more unless I’m having a really good day,” he said. “That’s gotten expensive.”

Households continue to benefit from a strong labor market and low 3.5% unemployment rate in September. Gasoline prices are also down from a mid-June peak.

But falling home values and a volatile stock market are creating uncertainty for many Americans. An index of pending home sales, which tracks contract signings for purchases of previously owned homes, fell 10.2% in September, the National Association of Realtors said Friday, the fourth straight month of decline.

The Dow Jones Industrial Average is down more than 11% this year, and home prices posted their biggest month-on-month decline in more than a decade in August as rising rates weighed on home-buying demand. Mortgage rates this week topped 7% for the first time in 20 years, according to Freddie Mac.

Sagging home sales are also a drag on spending for goods such as furniture and appliances. And lower home values hit consumer sentiment as declining real-estate prices reinforce consumers’ desire to pull back in anticipation of a downturn.

Households pinched by rising inflation pulled back on purchases of big-ticket items like vehicles in the third quarter, according to the Commerce Department.

“I think the major pressure we’re seeing right now in terms of consumer spending on outdoor recreation is a pressure on discretionary spending capabilities due to higher food costs, gasoline costs, other service costs they might be experiencing,”

Winnebago Industries Inc.

Chief Executive

Michael Happe

said during an earnings call this month.

Write to Harriet Torry at harriet.torry@wsj.com