Americans now expect prices to rise 3.9% over the next 12 months, up from 3.6% in August and the highest one-year inflation reading since May 2023, according to the Federal Reserve Bank of New York's Survey of Consumer Expectations released Monday.
The 0.3 percentage point monthly increase signals that inflation anxiety is building again among U.S. households even as the Federal Reserve weighs its next move on interest rates. The survey also found that consumers expect their household spending to grow 5.5% over the coming year — also up 0.3 percentage points from August and the highest level recorded since the survey began tracking that measure in 2013.
The gap between expected spending growth and expected income growth suggests households anticipate having to stretch budgets further. That dynamic could pressure the Fed to keep rates elevated for longer than markets currently anticipate.
The survey results land as Fed officials continue debating how restrictive monetary policy needs to be. Inflation has remained stubbornly above the central bank's 2% annual target, with the most recent Consumer Price Index reading for August showing prices still climbing faster than policymakers would like.
Markets widely expect the Federal Open Market Committee to hold its benchmark interest rate steady when it meets later in October, according to CME Group's FedWatch tool. The Fed has kept its target range at 5.25% to 5.5% since July 2023, the highest level in 23 years.
Longer-term expectations showed less deterioration. The survey's three-year inflation outlook ticked up just 0.1 percentage point to 2.7%, suggesting consumers believe price pressures will ease eventually even if the near-term picture has darkened.
The divergence between one-year and three-year expectations matters to Fed Chair Jerome Powell and his colleagues because they watch for signs that short-term inflation spikes are becoming embedded in public psychology. Anchored long-run expectations give the Fed room to look through temporary price surges without aggressive rate hikes.
Rising spending expectations carry their own complication. If households follow through and accelerate purchases, that demand could itself fuel additional inflation — a self-reinforcing cycle the Fed has spent two years trying to break.
The New York Fed survey, conducted monthly with roughly 1,300 respondents, is one of several gauges policymakers monitor alongside the University of Michigan's consumer sentiment survey and the Conference Board's expectations index. The Michigan survey's one-year inflation expectation stood at 3.1% in September, notably below the New York Fed's reading.
September's consumer price data, scheduled for release later this month, will provide the next major checkpoint for whether those expectations are being validated by actual price movements.
