Consumers' inflation expectations jump to highest level in three years

Americans' expectations for inflation over the next year jumped to their highest level in more than three years in September, according to a survey the Federal Reserve Bank of New York released Wednesday, even as households grew somewhat more confident about their job prospects. The split findings complicate the picture facing Federal Reserve officials less than three weeks after they raised interest rates for the first time since 2023.

The New York Fed's Survey of Consumer Expectations found that the median household now expects prices to rise 3.9 percent over the coming year, up three-tenths of a point from August and the highest reading since May 2023. At the same time, several measures of how people see the labor market improved, a combination that gives policymakers no clean signal to act on as they weigh whether to raise rates again this year.

The Numbers Behind the Shift

The monthly survey, which has polled a rotating panel of household heads across the country since 2013, asks respondents what they expect for prices, wages, debt and employment over several horizons. In September, the gap between near-term and long-term views widened. The one-year inflation reading rose to 3.9 percent from 3.6 percent, the three-year measure ticked up to 3.3 percent from 3.2 percent, and the five-year outlook held steady at 3.0 percent, where it has sat for most of the past year. Disagreement among respondents widened at every horizon, a sign that households are growing less certain, not just less optimistic, about where prices are headed.

The increase was broad-based. Respondents raised their year-ahead expectations for gasoline to 4.8 percent, for food to 5.5 percent, for medical care to 9.2 percent and for rent to 6.8 percent. The expected rise in college tuition jumped a full 1.4 points to 7.5 percent, the sharpest single-category move in the release. Expected growth in household spending climbed to 5.5 percent, also the highest since May 2023, even as the share of households reporting harder access to credit increased.

Views on the labor market moved the other way. The perceived chance of losing a job in the next 12 months fell to 13.5 percent, the lowest since December 2024, and the expected odds of finding a new job after a layoff rose to 46.1 percent, above its 12-month average. The mean probability that unemployment will be higher a year from now eased to 43.9 percent but remained above its own trailing average, leaving the labor outlook better than it has been but still shakier than normal.

A Fed Still Finding Its Footing

The survey lands against a backdrop of mixed and sometimes contradictory economic signals that have made the Fed's job unusually difficult this fall. On September 16, the Federal Open Market Committee voted unanimously to raise its benchmark rate by a quarter point, to a range of 3.75 percent to 4 percent, judging that inflation remained too elevated even as it described the broader economy as expanding at a solid pace.

The data released since then has not made the case any clearer. The Labor Department's August inflation report, published in mid-September, showed consumer prices up 3.4 percent from a year earlier and core prices, which exclude food and energy, up 2.4 percent. Two weeks later, the Commerce Department's broader measure of household income and spending showed personal income rising 0.2 percent in August and spending jumping 0.9 percent, with its own price gauge up 3.4 percent over the year. Then came a jobs report, released October 2, that cut the other way entirely: nonfarm payrolls grew by just 29,000 in September, and the Labor Department revised down its estimates for July and August by a combined 60,000 jobs, suggesting the labor market has been cooling faster than earlier data implied.

That is the puzzle now sitting in front of the Fed. Price pressure, by the official data and by what households tell survey takers, is not fading as quickly as hoped. Hiring, meanwhile, looks softer than it did even a few weeks ago. The consumer survey's improved job-loss and job-finding readings suggest households have not yet fully absorbed that weaker hiring picture, or do not expect it to affect them personally.

Diverging Pictures for Households and Policymakers

The practical effects of rising inflation expectations fall hardest on borrowers and lower- and middle-income households already managing tighter budgets. Expectations of worsening credit access, combined with higher expected spending growth, point to households stretching further to cover ordinary costs even as wage growth expectations slipped to 2.6 percent, in line with its 12-month average rather than keeping pace with the prices they expect to pay. One modest bright spot: the perceived probability of missing a minimum debt payment within three months fell a full point, to 12.2 percent, below its trailing average.

For the Fed, the survey is one input among many, but an important one, because economists have long argued that expectations themselves can become self-fulfilling if businesses and workers start pricing and bargaining around them. A commentary accompanying one account of the release, published by a markets-focused news service that tracks the survey monthly, noted that the five-year expectations reading at least held flat, offering the central bank some reassurance that longer-run views have not come unanchored even as the near-term number worsened.

Bond investors, mortgage borrowers and businesses setting prices for next year are all, in effect, downstream of this report. A consumer base that expects faster price growth tends to accept price increases more readily and to push harder for wage gains, a dynamic the Fed has spent more than three years trying to avoid reigniting.

What Happens Next

More data will arrive quickly to either confirm or complicate Wednesday's reading. The University of Michigan is due to publish its preliminary October consumer sentiment index, with its own competing inflation-expectations gauge, on Friday. The Labor Department's September inflation report follows on October 14, giving policymakers a harder measure of prices to set against the survey's softer, self-reported one.

The New York Fed's own account of the release was careful to draw a line between what consumers expect and what is actually happening to prices, noting that the survey measures sentiment rather than the inflation rate itself. But sentiment is precisely what the Fed will be parsing as it prepares for its next scheduled meeting, on October 27 and 28. Officials who voted for last month's increase will have to decide whether a softening labor market or hardening inflation expectations carries more weight, with a further, larger policy gathering in December to follow. Neither reading, on its own, points clearly toward a pause or another increase, which is likely to keep the debate inside the central bank, and in financial markets, unsettled for weeks to come.