A hot jobs market is continuing to help boost consumer spending.

Retail sales rose 0.7% in September from the previous month, more than double Wall Street's estimates for 0.3% growth, according to new data from the Commerce Department released on Tuesday. Retail sales have now grown from the month prior for six straight months, marking a consistent trend of consumer spending.

This, economists say, has been supported by an average of nearly 270,000 nonfarm payroll additions over the same period. With no clear signs of the labor market fully cooling, the strong position of the US consumer entering the fourth quarter of 2023 could provide upside risks to inflation that's already showing signs of stickiness — and prompt more Fed rate hikes.

"The economy is entering Q4 with more momentum than we previously thought," Oxford Economics lead US economist Michael Pearce wrote in a research note on Tuesday. "The risks to our forecast for a slight contraction in consumption in Q4 are firmly to the upside. The strength of the economy also means that Fed officials will leave the door open for additional rate hikes."

Fed Chair Jerome Powell has noted in the past that a stronger US economy could mean more Fed rate hikes to ensure prices fall.

"We’re not looking for a decrease in consumer spending," Powell said in September. "It’s a good thing that the economy’s strong ... If the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2% [inflation]—because we will get back to 2%."

Over the past week, Fed officials eased market concerns of another interest rate hike as central bankers explained credit tightening caused by rising bond yields could effectively take the place of another Fed rate hike. The discussion provided reprieve for bond yields, and stocks rallied.

But that shifted on Tuesday with the September retail sales report. Markets as of Tuesday afternoon are pricing in a roughly 40% chance that the Federal Reserve hikes interest rates at its December meeting, up from a 25% chance just a week ago, according to the CME FedWatch Tool. Stocks opened lower after the report, too, while bond yields rose. The 10-year Treasury yield breached 4.85%, its highest level in more than a week and just off its 16-year highs.

“Today’s strong report along with a recent string of positive economic surprises suggest the economy carried more momentum than previously thought over the summer," EY-Parthenon senior economist Lydia Boussour wrote in a research note on Tuesday. "This will keep the Federal Reserve on high inflation alert, and though it won’t tilt the Federal Open Market Committee toward another fed funds rate hike at the November meeting, the December meeting will very much remain a ‘live’ one."

All eyes on the labor market

The overall picture for the consumer is still murky. Credit card delinquencies have been on the rise, the personal savings rate just hit its lowest level of 2023, and it's still unclear how the return of student loan payments could hurt consumer spending.

"Pandemic-related sources of spending like excess savings and easy access to cheap credit are fading, but what this report tells us is that households have grown more comfortable spending at elevated rates," Wells Fargo's senior economist Tim Quinlan wrote in a research note on Tuesday.

And Quinlan highlights that willingness to spend might not be going anywhere.

"We have long stressed that real income is the last major driver of spending, and continued labor market tightness suggests income can continue to fuel consumption in the near term," Quinlan wrote. "In fact, the only thing that looks to break the back of this consumer would be weakness in the labor market.

But consistent weakness in the labor market isn't apparent at the moment. Outside of wages retreating toward pre-pandemic normalcy, the labor market remains robust. The US economy added more jobs in September than it had since January. Job openings still remain historically high as the most people look for jobs since before the pandemic. And layoffs have been muted as jobless claims have remained tame.

"We expect the consumer to remain supported in the next couple of quarters as long as the labor market remains strong," Citi's economics team wrote in a research note on Tuesday.

On Thursday, Powell is expected to provide an update on the economy during a speech at the Economic Club of New York.

Josh Schafer is a reporter for Yahoo Finance.

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