US Economy Grows 3.4% in Q3, Fastest in a Year, as Inflation Ticks Higher and Lagarde Quits ECB Early

The US economy expanded at a 3.4% annualized pace in the third quarter of 2026, beating the 3.2% consensus forecast and accelerating sharply from the 2.2% rate recorded in the second quarter, according to the Bureau of Economic Analysis advance estimate. The gain was the strongest in roughly a year, driven by robust consumer spending, which rose 3.8% and matched the prior quarter's pace, and by a surge in AI-related capital expenditure. The GDP price index fell sharply to 2.2% from 6.1% in Q2, well below the 3.2% estimate, suggesting the quarter's growth came without broad-based price acceleration even as overall inflation remained elevated.

The September personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose 0.5% month over month, up from 0.3% in August and described by one analyst as matching the second-hottest monthly print since June 2022. Year over year, headline PCE climbed to 3.6% from 3.4%, in line with the 3.6% consensus but the highest reading in four months. Core PCE, which strips out food and energy, rose 0.3% on the month and 3.1% annually, also meeting expectations but edging above the 3.0% prior reading. Within-quarter core PCE for Q3 came in at 2.5%, slightly above the 2.4% forecast and down from 3.3% in Q2. Personal income rose only 0.2% in September, below the 0.3% estimate, while real disposable personal income fell 0.3%, and the personal saving rate dropped to 3.8%, its lowest since October 2022.

Labor market data released simultaneously pointed to continued resilience. Initial jobless claims for the week ending October 24 fell to 194,000, below the 198,000 estimate and the lowest since mid-July. Continuing claims dropped to 1.701 million, also under the 1.720 million forecast. The combination of stronger-than-expected growth and still-elevated inflation prompted market commentary that the case for a Federal Reserve rate hike in December has strengthened, with one market pricing 83% odds of such a move. The Fed had held rates steady at its meeting the prior day, with two officials already dissenting in favor of an immediate hike.

In Europe, the ECB held all three key interest rates unchanged, with the deposit facility rate remaining at 2.50%, in line with universal expectations. The bank warned that rising energy prices pose upside risks to inflation and downside risks to growth, and noted that the increased magnitude and duration of the energy shock is likely to drive inflation higher. Underlying inflation has remained broadly stable and wages have not shown a material response to the energy shock so far. The ECB reiterated its data-dependent, meeting-by-meeting approach without committing to a specific rate path. Earlier on Thursday, ECB President Christine Lagarde announced she will step down on February 7, 2027, roughly nine months before her eight-year term was due to expire in October 2027. Her early departure opens a high-stakes succession race at a moment of elevated inflation, rising bond yields, and geopolitical pressure. Pablo Hernandez de Cos of Spain and Klaas Knot of the Netherlands were identified as leading candidates to replace her.