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

Consumer inflation expectations jumped in September to their highest level since mid-2023, according to the New York Federal Reserve's Survey of Consumer Expectations. The median one-year inflation outlook rose to 3.9% from 3.6% in August, marking the highest reading since May 2023.

The same survey showed households expect spending growth to accelerate to 5.5%, also up from 5.2% the prior month and the highest level since May 2023.

The uptick in near-term inflation fears contrasts with longer-dated expectations, which remain more stable. The three-year inflation view edged up to 3.3%, while the five-year expectation held steady at 3.0%. Federal Reserve officials consider inflation expectations a key variable in actual price growth.

Energy costs appear to be driving the concern. Gasoline prices climbed nearly 4% in August alone, and fuel oil surged more than 10%, according to the Bureau of Labor Statistics. At the utility level, requests for rate increases reached $23.1 billion so far in 2026, with the third quarter alone accounting for $4.5 billion, a record for that period, according to PoweLines, a consumer advocacy group. Survey respondents expect gas prices to rise 4.8% over the next year.

Market-based inflation indicators paint a less optimistic picture than consumer surveys. A closely watched bond market breakeven measure for five-year inflation sits near its highest level of the year at 2.35%. Treasury yields have climbed sharply in recent weeks, reaching levels not seen since the early 2000s.

Financial markets expect the Federal Open Market Committee to hold interest rates steady when it meets later in October. August inflation data arrived softer than anticipated on the Fed's preferred gauge. Several top Fed officials, including New York Fed President John Williams, have recently signaled policymakers can move deliberately when deciding on future rate adjustments.

However, markets are pricing in a much more aggressive Federal Reserve further ahead. Fed funds futures contracts imply a funds rate of 5.58% in five years. The current target range sits at 3.75% to 4.0%.