Americans' expectations for inflation over the next year held steady at 3.9% in October, according to the Federal Reserve Bank of New York's monthly Survey of Consumer Expectations. The reading, unchanged from September, suggests that households see price pressures persisting but not accelerating.
At the same time, the survey found that uncertainty about future inflation eased, meaning consumers are more confident about where prices are headed. However, worries about losing a job ticked up, a potential warning sign for the labor market.
What the survey shows
The New York Fed's survey asks a representative sample of consumers about their expectations for inflation, wages, and the job market. The one-year inflation expectation is closely watched by economists and policymakers because it can influence actual price-setting behavior—if people expect higher inflation, they may demand higher wages, which can feed into a self-fulfilling cycle.
The 3.9% reading is still well above the Fed's 2% target, but it's down significantly from the peak of around 6.8% in mid-2022. The fact that it has held steady for the past couple of months suggests that the sharp declines seen earlier this year have stalled.
Meanwhile, the survey's measure of inflation uncertainty—which captures how much disagreement there is among consumers about future price moves—declined. That's a positive sign, as less uncertainty can help households and businesses plan more effectively.
Job-loss worries creep up
One notable shift in the October survey was a rise in the perceived probability of losing one's job in the next 12 months. While the survey didn't provide a specific figure, the uptick aligns with other data pointing to a cooling labor market.
This comes as the Federal Reserve has been keeping interest rates at elevated levels to fight inflation, which can slow hiring. The central bank has signaled it may be done raising rates, but it has also indicated that rates will likely stay higher for longer until inflation is convincingly on track toward 2%.
For everyday investors, the combination of sticky inflation expectations and rising job-loss worries is a mixed bag. On one hand, steady inflation expectations suggest the Fed may not need to hike rates further, which could be supportive for stocks and bonds. On the other hand, a weakening job market could hurt corporate profits and consumer spending.
What it means for investors
Inflation expectations are a key input for the Federal Reserve's policy decisions. If consumers start to expect significantly higher inflation, the Fed might feel compelled to act more aggressively. The fact that expectations are holding steady gives the Fed room to pause its rate-hiking campaign.
This is particularly relevant as investors await the next batch of inflation data. Recent moves in Treasury yields have been driven by uncertainty over the path of inflation, and the dollar has also been sensitive to these expectations. The New York Fed survey adds another data point to that picture.
For bond investors, steady inflation expectations are generally a positive, as they reduce the risk of a sharp rise in long-term yields. For stock investors, the picture is more nuanced. While lower inflation uncertainty can reduce market volatility, the uptick in job-loss worries could signal weaker consumer demand ahead.
It's also worth noting that inflation is a global phenomenon. Recent data from other countries shows similar trends—for instance, Mexico's inflation accelerated for a third month, while China's factory costs are outpacing consumer prices. These dynamics can influence global supply chains and commodity prices, which ultimately feed into domestic inflation.
The bottom line
The New York Fed's survey is just one of many indicators the Fed and investors watch. While it shows inflation expectations are holding steady, the rise in job-loss worries is a reminder that the economy faces multiple challenges.
For ordinary investors, the key takeaway is that inflation is likely to remain a central theme for markets in the coming months. Keeping an eye on inflation expectations and labor market data can help you understand the Fed's next moves and how they might affect your portfolio.
As always, it's important to maintain a diversified portfolio that can weather different economic scenarios. No single data point should drive your investment decisions, but understanding the broader trends can help you make more informed choices.
