US households became a bit more anxious about the path of prices over the next year, according to a closely watched survey from the Federal Reserve Bank of New York. The bank's September Survey of Consumer Expectations showed that consumers now expect inflation to run at 3.9% over the next 12 months, up from 3.6% in August.
The uptick in near-term expectations comes even as longer-run views remained remarkably stable. Five-year inflation expectations held steady at 3.0% for the thirteenth consecutive month, suggesting that households still believe the Federal Reserve can bring prices under control over time.
What the survey measures
The New York Fed's survey asks a representative sample of households about their expectations for inflation, the job market, and household finances. It's one of several indicators the Fed watches to gauge whether inflation is becoming entrenched in people's thinking.
In addition to the one-year bump, the median three-year inflation expectation edged up to 3.3% from 3.2%. Respondents also reported greater uncertainty about inflation over both the one- and three-year horizons, meaning they are less confident about where prices are headed.
The survey also captures expectations for other parts of the economy. While the brief doesn't detail those, such surveys typically include questions about wage growth, spending, and credit conditions. These can offer clues about whether consumers are pulling back or feeling more squeezed.
Why it matters for the Fed
Inflation expectations matter because they can become self-fulfilling. If people expect prices to rise quickly, they may demand higher wages, and businesses may pass those costs on to customers, creating a cycle that keeps inflation elevated.
The fact that five-year expectations have stayed at 3.0% for over a year is a positive sign for the Federal Reserve. It suggests that, despite the recent bump in near-term views, households haven't lost faith in the central bank's ability to bring inflation down over the long haul.
Still, the rise in one-year expectations could give Fed officials pause. The central bank has been trying to cool inflation without tipping the economy into recession, and any sign that consumers are bracing for faster price increases could complicate that effort.
This survey comes at a time when Treasury yields have been easing from 24-year highs, partly as investors weigh the path of interest rates and upcoming inflation data. The Fed has raised its benchmark rate aggressively over the past year, and markets are watching for clues about whether more hikes are needed.
What it means for investors
For everyday investors, the survey is a reminder that inflation is still a live issue. Even if longer-term expectations are anchored, the near-term uptick could influence how the Fed sets policy in the coming months.
If the Fed sees inflation expectations drifting higher, it may feel pressure to keep interest rates higher for longer. That would affect borrowing costs for mortgages, car loans, and credit cards, and it could weigh on stock valuations, especially for growth companies that are sensitive to higher discount rates.
On the other hand, the stability of five-year expectations suggests that the Fed's credibility remains intact. That could give policymakers room to be patient and avoid overtightening, which would be a positive for risk assets.
Investors should also keep an eye on how these expectations translate into actual spending. If consumers become more worried about inflation, they might cut back on discretionary purchases, which could hit retailers and other consumer-facing companies. Recent data has already shown US luxury spending fell 6% in September, according to Citi card data, a possible sign that higher prices are starting to bite.
Globally, inflation expectations are a hot topic. Central banks in many countries are grappling with similar challenges. For instance, Poland held rates at 3.75% as fuel-driven inflation tops target, and Sweden's inflation cooled but its central bank still eyes a rate hike. These examples show that the fight against inflation is far from over in many parts of the world.
The bottom line
The New York Fed's September survey offers a mixed picture. Near-term inflation expectations ticked up, but longer-term views stayed put. For the Fed, the key question is whether the rise in one-year expectations is a blip or the start of a trend.
For investors, the takeaway is to stay informed and prepared for continued volatility. Inflation is still running above the Fed's 2% target, and the path to lower prices is unlikely to be smooth. Keeping an eye on inflation expectations, along with actual inflation data, can help you understand where the economy and markets might be headed.
