Key economic reports due this week are expected to add further evidence that the US economy is strengthening, bolstering arguments from several Federal Reserve officials that interest rates should be higher.

Expectations for a rate hike as soon as October have climbed, after recent data showed retail sales jumped in August and business activity in September rose at the fastest pace in more than five years.

That good news on growth comes with a sting: Inflation remains above the Fed's 2% target, pressuring the central bank to put the pinch on households and firms by raising rates again, after lifting them earlier this month for the first time in three years. Adding to the tension, the Fed's next rate decision will come days before hotly anticipated midterm elections.

Economists expect figures Wednesday to show inflation-adjusted consumer spending surged in August by the most this year. And while a revamp of the Fed's preferred gauge of underlying inflation is seen reducing the annual measure by as much as three-tenths of a percentage point, the monthly picture is less comforting.

The core personal consumption expenditures price index, which excludes food and energy, is forecast to rise 0.3% — a pickup from the prior two months.

Those numbers will be followed on Friday by fresh employment data forecast to show that jobs growth remains robust. As of Friday, economists expected employers to add about 90,000 workers in September and unemployment to remain at 4.1%.

If companies continue to hire at their recent pace, the picture of a slow ascent for interest rates could change, said Michael Feroli, chief US economist at JPMorgan Chase & Co.

"In the past few years the inflation seems supply-shock driven," Feroli said. "But if the labor market were to tighten and wage growth pick up, then I think we might start to think there's too much good news on growth."

Various Fed officials used speeches and public appearances last week to issue a string of warnings that inflation remains too high. Fed Governor Michael Barr said further rate hikes will likely be needed to slow prices, while Chicago Fed President Austan Goolsbee warned that the road back to the central bank's 2% target won't be without pain.

Goolsbee, Richmond Fed President Tom Barkin, Cleveland's Beth Hammack and Philadelphia's Anna Paulson also pointed to signs the overall economy is gathering momentum, if only gradually. 

"The concern is that, could we see things heating up?" Hammack said Friday. "Right now when I'm out traveling the district, talking with businesses, I hear that spending is very resilient."

A historic boom in artificial intelligence is powering construction and manufacturing, and companies and households continue to spend in the face of surging oil prices linked to the Iran war.

Bond yields are another factor for policymakers to consider as investors bet the central bank will raise interest rates at least once more this year.

"Part of the inflation that we're seeing now is because the economy is so strong," said Beth Ann Bovino, chief economist at US Bank. "The likelihood of another rate hike is becoming very real."

Pricing in federal funds futures at the end of last week put that likelihood of a hike in October at about 65%.

Vulnerable Households

To be clear, not all of the economy is booming, and a heavy reliance on the AI boom may yet turn into a liability.

Higher borrowing costs will expose an underlying fragility, especially among vulnerable households, cautioned Patrick Harker, a former president of the Philadelphia Fed now at the University of Pennsylvania's Wharton School.

"I do think that we have to be careful," Harker said. The economy, he said, is "running on one very large engine — with the data center build-out — and the associated electrical grid build-out. The rest of the economy seems to be gliding, it's not really doing a whole lot."

Credit-card and auto-loan delinquencies have been trending higher in recent years, according to data from the New York Fed. In the first quarter of this year, the credit-card delinquency rate rose to the highest since 2011 and remained elevated in the second quarter.

The housing market is already stuck with mortgage rates climbing to their highest level in more than two years.

In the real economy, higher borrowing costs matter.

Hit by Rates

One of those feeling the sting is Aurelius Chaves, president and owner of Midland Machinery, a manufacturer of road building equipment based in Tonawanda, New York. He's had to manage sharp increases in costs — from healthcare for his workers to insurance for his business. When the Fed raises rates, it hits both the cost of his own loans and the equipment dealers who buy his products.

"I sell to a dealer network, and so when their costs go up, they start reducing inventory," Chaves said. "I know exactly how much every quarter-point increase is going to cost me in additional interest next year."

For now, Chaves says overall business is holding up, a sentiment borne out by other readings too.

The Orange Book, prepared by Bloomberg Economics and Bloomberg Intelligence, found that more than two-thirds of industries cited an accelerating economic recovery in recent earnings calls, mostly crediting the AI investment boom.

That strength was cited by Fed Chairman Kevin Warsh, who framed the central bank's recent decision to raise interest rates in part around a sunny outlook for accelerating growth.

"Consider the geopolitical landscape of shocks and uncertainty, and you begin to appreciate the resilience of the US economy," Warsh told reporters on Sept. 16.

Should policymakers decide to raise rates again on Oct. 28, less than a week ahead of crucial midterm elections, the challenge for Warsh will be how to package that message for the man who put him in the job. 

While President Donald Trump has pulled back on his scathing criticism of the Fed, he made his outlook clear at Warsh's swearing-in ceremony in May.

"Unlike some of his predecessors, Kevin understands that when the economy is booming, that's a good thing," Trump said. "We don't have to go crazy, just let it boom."