Inflation concerns continued to rise in September, with data from the New York Federal Reserve Bank's monthly consumer expectations survey showing that short-term inflation expectations among Americans climbed to their highest level in nearly three and a half years. This survey provides important insight into American residents' inflationary psychology and consumption behavior. Currently, US inflation remains significantly higher than the Federal Reserve's 2% policy target, and the Fed is weighing its monetary policy stance. Although the market widely anticipates that the Fed will maintain its benchmark interest rate at its late October meeting, continued increases in energy prices, coupled with rising forward interest rates, have added uncertainty to the future direction of monetary policy.

Short-term inflation and spending expectations rose in tandem.

This consumer expectations survey report shows that the median inflation expectation for the next 12 months rose to 3.9%, an increase of 0.3 percentage points from August, reaching a new high since May 2023 , when the expectation was 4.1%. Meanwhile, the expected growth rate of household spending rose to 5.5%, also up 0.3 percentage points month-on-month, also reaching its highest level since May 2023. Against the backdrop of persistently high inflation, Federal Reserve officials are struggling to determine the appropriate tone for monetary policy. According to mainstream market expectations, the Federal Open Market Committee (FOMC) is likely to keep the policy benchmark interest rate unchanged at its meeting later in October, as the Fed's preferred inflation gauge performed below market expectations in August. Recently, several key officials, including New York Fed President John Williams, have stated that policymakers can calmly assess the appropriate level of interest rates.

Medium- to long-term inflation expectations remain relatively stable

Compared to the significant rise in short-term expectations, longer-term inflation expectations have not fluctuated dramatically, and the overall anchoring effect remains acceptable. Survey data shows that respondents' inflation expectations for the next three years have risen slightly by 0.1 percentage points to 3.3%, while five-year inflation expectations remain unchanged at 3%. However, the inflation signals reflected in the bond market are more pessimistic. The break-even inflation indicator, which the market closely watches, shows that five-year market inflation expectations have reached 2.35%, a high for the year. In recent weeks, US Treasury yields have continued to surge, reaching their highest levels since the beginning of this century. Federal Reserve officials have consistently regarded inflation expectations as the core factor driving actual inflation trends; if residents' expectations continue to rise, it will increase the difficulty of prices falling.

Energy costs have become a key driver of rising inflation.

Soaring energy prices are the core trigger for the resurgence of inflationary pressures. Data from the U.S. Bureau of Labor Statistics shows that in August alone, gasoline prices rose by nearly 4%, and fuel oil prices surged by over 10%. Demands for price increases from residential utilities are also significant. According to Power Lines, a neutral consumer advocacy organization, U.S. utility companies have submitted price increase requests totaling $23.1 billion by 2026, with $4.5 billion submitted in the third quarter alone, setting a record high for that quarter. A survey by the New York Federal Reserve shows that consumers expect gasoline prices to rise by 4.8% over the next year, an upward revision of 0.2 percentage points from August's forecast. The transmission effect of energy product prices is subtly changing ordinary people's perceptions of price trends.

Forward interest rate pricing suggests a long-term tight monetary policy.

Although the market anticipates that the Federal Reserve will not adjust interest rates at its next policy meeting, trading pricing reflects market expectations that the Fed's policy stance will be more hawkish in the coming years. Federal funds rate futures contracts imply a policy rate of 5.58% five years from now, while the current target range for the federal funds rate remains at 3.75% to 4%. This means that the capital markets believe the high-interest-rate environment may persist for a long time, and the pace of rate cuts may be much slower than previously anticipated.

Conclusion

The latest New York Fed consumer expectations survey reveals a significant increase in short-term inflation concerns among residents, while medium- to long-term inflation expectations remain stable, creating a divergence. Rising energy prices have directly increased consumers' perceived price levels, and the pricing of forward interest rates in the US Treasury market has also signaled a hawkish stance. Going forward, the Fed will need to continue to find a balance between curbing inflation and supporting the economy. Short-term interest rates are likely to remain unchanged, but the upward risk to residents' inflation expectations will continue to limit the Fed's room for rate cuts. Subsequent changes in price and employment data will continue to influence global asset price trends.