Inflation fears on the rise as one-year outlook in Fed survey hits highest level since May 2023

Inflation expectations among US consumers hit their highest level in nearly 3½ years in September, according to the New York Federal Reserve's Survey of Consumer Expectations.

The median one-year inflation outlook climbed to 3.9% in September, up 0.3 percentage point from August and the highest since May 2023, when it reached 4.1%. The survey also showed household spending growth expectations rose to 5.5%, matching the highest level since May 2023.

These results arrive as Federal Reserve officials debate the appropriate stance on monetary policy with inflation persisting well above the central bank's 2% target. Markets expect the Federal Open Market Committee to hold rates steady at its October meeting. August inflation data came in lower than expected on the Fed's preferred gauge, and New York Fed President John Williams recently said policymakers can afford to take time when setting rate policy.

Longer-term expectations remain better anchored. The three-year inflation outlook edged up 0.1 percentage point to 3.3%, while the five-year expectation held steady at 3%. Market-based indicators paint a less optimistic picture. A closely watched bond market breakeven indicator for the five-year outlook sits around 2.35%, near its highest level of the year. Treasury yields have surged in recent weeks to levels unseen since the early 2000s.

Energy costs are driving the near-term inflation pressures. Gasoline prices rose nearly 4% in August alone, according to the Bureau of Labor Statistics, while fuel oil surged more than 10%. Utilities have filed for 23.1 billion dollars in rate increases through 2026 so far, with the third quarter alone accounting for 4.5 billion dollars in requests, the largest sum for any third quarter on record, per PoweLines, a nonpartisan consumer advocacy group. The Fed survey found consumers expect gas prices to rise 4.8% over the next year, up 0.2 percentage point from August.

While markets expect the Fed to pause at its upcoming meeting, futures contracts price in much higher rates ahead. Fed funds futures are implying a rate of 5.58% in five years. The current target range sits between 3.75% and 4%.