Consumer Inflation Expectations Hit 3.9%, Highest Level Since May 2023

Inflation Anxiety Climbs to a Three-Year Peak

American households are bracing for the worst inflation outlook they have held in nearly three and a half years. The Federal Reserve Bank of New York's September Survey of Consumer Expectations, released October 7, put the median one-year inflation expectation at 3.9%, up 0.3 percentage point from August and the highest reading since May 2023, when the figure stood at 4.1%28. The three-year outlook edged up to 3.3% while the five-year measure held steady at 3.0%, a sign that the deterioration is concentrated in the near term rather than a broad unmooring of expectations67.

The anxiety is not abstract. Households expect the fastest price growth in precisely the categories they cannot avoid: 5.5% for food, 4.8% for gasoline, 6.8% for rent, 7.5% for college education and 9.2% for medical care over the next year18. The college figure jumped 1.4 points in a single month, and gasoline and college expectations have now risen for three straight months10.

What makes the survey unusual is that it captures both fear and resilience at once. Consumers are simultaneously planning to spend more and feeling poorer — a combination that says more about the price level than about consumer appetite.

Consumers Plan to Spend More — Because Everything Costs More

Median expected household spending growth rose 0.3 percentage point to 5.5% in September, matching the inflation expectation and marking the highest reading since May 2023, with the increase broad-based across age and education groups110. Expected household income growth, by contrast, rose only 0.1 point to 3.1%, its highest since February 2025110. Expected earnings growth actually fell 0.3 point to 2.6%, well below expected inflation — implying households expect prices to rise half as fast again as their pay8.

That gap is the heart of the story. The higher spending expectation partly reflects what households think their purchases will cost rather than a plan to buy more goods and services1. In effect, consumers are budgeting for a bigger grocery bill and a bigger rent check, not a bigger cart.

Survey data from private trackers tell the same story from a different angle. Among consumers who expect to spend more this holiday season, 42% say they are doing so simply to match last year's standard against rising prices, not because they feel more flush, and the average planned holiday spend sits at roughly $8185. A Kenco survey of North American consumers found 43% plan to spend more during peak season and 59% name pricing and inflation as their biggest worry, with 45% of those expecting higher prices blaming import tariffs9.

The CPI Backdrop: Headline Inflation Stuck at 3.4%

The pessimism is grounded in the actual price data. The Bureau of Labor Statistics' August report showed the Consumer Price Index rising 0.4% on the month, with the year-over-year rate holding at 3.4% for the second consecutive month, still well above the Fed's 2% target2227. The August print capped a volatile year: the annual rate began 2026 at 2.4% in January, spiked to 4.2% by May, and has since settled in the mid-3% range29.

Energy is the dominant force. Gasoline prices rose 3.9% in August alone and were up 27.4% from a year earlier, accounting for more than a third of the monthly headline increase, while the broader energy index climbed 16.3% year over year2122. Fuel oil surged more than 10% in August, and at the pump the national average reached $4.37 a gallon, versus about $3.12 a year earlier24. Beyond the pump, utilities have filed for $23.1 billion in rate increases so far in 2026, including $4.5 billion in the third quarter alone — the largest third-quarter total on record, according to the consumer advocacy group PowerLines26.

Core inflation, which strips out food and energy, told a more mixed story: it eased to 2.4% year over year in August from 2.5% in July, though TD Economics flagged that core prices rose a tick hotter than expected on the month, driven by the strongest gain in non-housing services since January2223. The Fed's preferred gauge, the PCE price index, ran at 3.4% annually in August with core at 3.0%1320.

Spending Defies Gravity While Real Incomes Stall

The paradox of the moment is that actual consumer behavior has been far stronger than sentiment would suggest. The Bureau of Economic Analysis' final revision, released September 30, lifted second-quarter real GDP growth to a 2.2% annualized rate from the previously reported 1.5%, beating the 1.5% that economists polled by LSEG had expected1619. Personal consumption was revised up sharply to 3.8% annualized growth, with durable goods outlays surging 7.4% and services up 3.4%, and real final sales to private domestic purchasers — a cleaner gauge of domestic demand — rose 4.6%1219.

The August personal income and outlays report shows the tension beneath that strength. Nominal spending jumped 0.9% in August, and real spending rose 0.6%, while real disposable income growth went from a 0.3% gain in July to zero1120. The personal saving rate slipped to 4.1% from 4.6% the prior month1113. In other words, consumers bought considerably more in real terms during a month when their inflation-adjusted income did not rise at all20.

Economists are nearly unanimous that this cannot continue indefinitely. Heather Long, chief economist at Navy Federal Credit Union, noted that spending remained strong in August but income growth is not keeping up, with many households dipping into savings or using credit — a pattern she called unsustainable34. Bank of America Global Research quipped that "the consumer continues to defy gravity" while cautioning that the gasoline price surge could weigh on discretionary purchases and hit lower-income households hardest, potentially feeding into food inflation34. Deloitte's forecasters make the same point at a longer horizon: consumer spending growth has outpaced post-tax income growth since June 2024, suggesting a pullback is coming, with real consumer spending expected to slow to 1.4% next year14.

Job Security Provides the Cushion

The one unambiguously good news in the New York Fed survey concerns employment. The perceived probability of losing a job in the next 12 months fell to 13.5%, its lowest since December 2024, while the probability of finding a new job after a layoff rose 0.7 point to 46.1%110. The broader labor market data corroborates the optimism: employers added 162,000 jobs in August and the unemployment rate held at 4.1%13.

Yet even here there are cracks. PYMNTS Intelligence found its job security measure still high at 80.4, but its job mobility index fell 2.2 points to 46.9, below the neutral level of 50 — workers feel safe in the job they have but less sure about their options if circumstances change1. And the financial buffer beneath the labor market is thin: 51.8% of consumers said their savings would support their current lifestyle for three months or less if income stopped, with only 15.1% saying savings would last more than a year, a 12-month low1. Households also reported that access to credit had become more difficult compared with a year earlier, though the perceived probability of missing a minimum debt payment fell to 12.2%110.

What It Means for Growth and the Fed

For GDP, the reading matters because consumption is roughly 68% of the economy, and the second quarter's upward revision was driven substantially by consumer spending across both goods and services1718. EY now expects the economy to advance close to 2.5% in 2026 and possibly above 4% annualized in the third quarter before settling near a 2% pace over the next 12 months12. Deloitte projects growth moderating from 2.1% in 2026 to 1.9% by 2028 as elevated inflation and rising rates weigh on both investment and consumption14.

For the Federal Reserve, the survey lands awkwardly. Fed officials treat expectations as a key driver of actual inflation, because expectations shape how people spend, bargain for wages and set prices24. Inflation running well above the 2% target, combined with near-term expectations at a multi-year high, strengthens the case that several officials have already made for another rate increase before year-end — minutes referenced by analysts indicate most officials saw another hike coming after a unanimous rise to the 3.75%-4% range68. TD Economics argued the hot core reading left the Fed "little room to remain on the sidelines"23. Yet markets largely expect the Federal Open Market Committee to hold rates steady at its October meeting, with New York Fed President John Williams among those saying policymakers can afford to take their time26. Market-based signals are less reassuring: five-year breakevens sit around 2.35%, near their highest of the year, and Treasury yields have climbed to levels unseen since the early part of the century2.

The divergence in coverage is itself informative: reporting on the Fed's next move splits between a likely October hold and mounting pressure for a hike by December, reflecting a genuine unresolved debate among policymakers.

The Takeaway

The most likely read is that the consumer remains the economy's engine but is running on a shrinking fuel reserve. Employment expectations are strong enough to sustain consumption, while higher expected prices, stagnant real disposable income, thinner savings and tighter credit leave households with progressively less flexibility in how each dollar is allocated120. Holiday spending will probably stay firm in dollar terms while becoming more selective underneath the aggregate — consumers facing higher grocery, rent, medical and fuel costs have fewer dollars left over after recurring expenses1. Retailers heading into peak season should therefore read the 5.5% spending expectation as inflation arithmetic, not demand signal: more dollars spent, fewer things bought, and a shopper whose assessment of whether it is a good time for a major purchase is weakening by the month15.