If you felt prices might heat up again, you are not alone. The New York Fed's latest Survey of Consumer Expectations put the median one-year inflation outlook at 3.9% in September, 0.3 percentage point higher than August and the loftiest reading since May 2023, when it registered 4.1%.
Households also anticipate faster spending, projecting 5.5% growth, up 0.3 percentage point from the prior month and matching the strongest pace since May 2023. Looking further ahead, the survey indicated the three-year inflation expectation edged higher by 0.1 percentage point to 3.3%, and the five-year outlook remained unchanged at 3%.
Inflation expectations shape behavior long before prices actually move. Market Briefs reads these surveys free every morning.
These readings land as Fed officials debate how restrictive policy needs to be with inflation still above the 2% goal. August inflation came in softer than expected by the Fed's preferred gauge, and several policymakers, including New York Fed President John Williams, said recently they can take their time assessing where rates should land. Markets mostly expect the Federal Open Market Committee to keep its benchmark rate unchanged later in October.
Market pricing is less forgiving. A widely watched five-year breakeven measure sits near its yearly peak around 2.35%, and Treasury yields have surged to heights last seen in the early years of this century. Expectations matter to the Fed, and futures markets imply a federal funds rate of 5.58% in five years, compared with today's 3.75% to 4% target range.
Investors are penciling in a steady hand from the Fed this month even as yields reset higher and rate bets further out climb. With near-term inflation expectations up, longer-term views mostly anchored, and futures pricing a higher policy rate over time, the cost of money is doing more of the heavy lifting on returns and risk.
What households expect tends to become what they accept. Get the free Market Briefs daily newsletter and follow the data.
