American consumers are sending the Federal Reserve an uncomfortable message ahead of its September policy meeting: they do not expect inflation to return quickly to the central bank’s 2% target, but they are also becoming more concerned about jobs, credit and their own financial position.
The Federal Reserve Bank of New York’s August Survey of Consumer Expectations showed median inflation expectations holding at 3.6% over the next year and 3% over five years. Expectations three years ahead improved slightly, falling 0.1 percentage point to 3.2%.
That is a mixed result rather than a clear improvement.
Consumers are not expecting another major inflation acceleration over the long run, but neither are they anticipating a rapid return to the Fed’s goal. At the same time, the share expecting unemployment to rise over the next year reached its highest level since April 2020.
The combination complicates the Fed’s September 15-16 meeting. Raising rates could help contain inflation expectations and demand, but it would also tighten financial conditions at a time when households are becoming less confident about employment and credit availability.
Short-Term Inflation Expectations Remain Elevated
The New York Fed survey, conducted between August 3 and August 31, found that one-year inflation expectations remained at 3.6%.
That figure had already fallen from 3.7% in June to 3.6% in July, so August represents stabilization rather than another step lower.
Three-year expectations declined to 3.2%, while five-year expectations remained at 3%.
Longer-term expectations are especially relevant for monetary policy because the Federal Reserve wants households and businesses to remain confident that inflation will eventually return toward its target. Expectations that become persistently elevated can influence wage negotiations, pricing decisions and consumer behavior.
The latest survey does not show expectations becoming completely unanchored. Five-year expectations did not rise.
But 3% remains above the Fed’s 2% objective, and uncertainty around future inflation increased at both the one-year and five-year horizons.
Current inflation is also still running well above target.
The Fed’s preferred personal consumption expenditures price index increased 3.7% from a year earlier in July, unchanged from June. Core PCE inflation, which excludes food and energy, was 3.3%.
The broader Consumer Price Index rose 3.4% from a year earlier in July, while core CPI increased 2.5%.
Those measures use different methodologies, but none yet gives policymakers a clean signal that inflation has returned to 2%.
Gasoline Expectations Jump Before Oil’s Latest Surge
Energy provides one of the clearest reasons households remain cautious about prices.
Consumers’ expected increase in gasoline prices over the next year jumped 1.7 percentage points in August to 4.6%.
Expected food-price growth rose to 5.3%, while consumers anticipated rent increasing 6.6%. Expected medical-care costs reached 9.1%, and college costs were seen rising 6.1%.
Those figures measure what households expect rather than actual future price changes, but they illustrate how inflation looks different from the consumer’s perspective than it does in a single headline index.
Housing, groceries, gasoline, healthcare and education are recurring expenses that can shape perceptions of inflation even when some categories elsewhere in the economy are getting cheaper.
There is another reason the gasoline number deserves attention.
The New York Fed survey ended August 31. Since then, the energy shock has worsened.
Brent crude has climbed above $100 a barrel as fighting involving the United States and Iran intensified and attacks on shipping increased fears of further disruptions to Middle Eastern energy supplies. Brent was trading around $100.50 early Thursday and has risen nearly 30% from its early-August lows.
That means the August survey may not fully capture the latest increase in consumer concern about fuel prices.
If crude remains above $100, gasoline and transportation costs could become a more visible source of inflation anxiety in September.
Jobs Are Stronger Than Consumers Feel
The other side of the survey is the labor market.
The mean probability that consumers assign to the U.S. unemployment rate being higher one year from now jumped 1.6 percentage points to 44.4%.
That was the highest reading since April 2020, when the pandemic was causing extraordinary disruption across the labor market.
The increase was broad-based across age, education and income groups.
Consumers also became less confident that they could quickly find another job if they lost their current one. The perceived probability of finding a new job following a job loss slipped 0.8 percentage point to 45.4%.
Yet households did not become more worried about being fired immediately.
The perceived probability of losing a job within the next year declined to 13.8%, its lowest level since February.
That creates an unusual picture: workers generally believe their existing jobs are relatively secure, but they are increasingly concerned that the broader labor market will become harder to navigate.
The official employment data are currently stronger than those expectations suggest.
U.S. employers added 162,000 jobs in August, while the unemployment rate remained at 4.1%, according to the Bureau of Labor Statistics.
Fed Chair Kevin Warsh recently described the labor market as “quite stable” and said the 4.1% unemployment rate remained low by historical standards.
Warsh has therefore argued that inflation should currently receive greater attention from policymakers.
“The Fed’s predominant focus right now should be on prices,” he said during his August speech in Jackson Hole after pointing to inflation remaining well above target.
Consumers Are Growing More Cautious About Their Finances
The New York Fed survey showed that inflation and employment are not consumers’ only concerns.
Perceptions of household finances worsened in August.
A larger share of respondents said their financial situation was worse than a year earlier, and more expected their finances to deteriorate during the coming year.
Consumers also reported that obtaining credit had become more difficult and expected access to credit to become tighter.
The perceived probability of missing a minimum debt payment during the next three months rose 1.2 percentage points to 13.2%, above its 12-month average of 12.7%.
Expected household income growth remained at 3%.
Expected spending growth, however, increased to 5.2%.
That gap is worth watching.
Consumers are expecting spending to rise faster than their household income, although higher expected spending does not necessarily mean households intend to purchase substantially more goods and services. Part of the increase could reflect expectations that the same expenses will simply cost more.
The survey also found that expectations for earnings growth increased slightly to 2.9%.
Taken together, those numbers describe households still willing or expecting to spend but increasingly sensitive to debt, prices and financial conditions.
That Matters for Retailers and Consumer Stocks
For publicly traded consumer companies, the survey does not suggest an immediate collapse in spending.
It does suggest shoppers may remain highly selective.
If consumers expect food, rent, healthcare and gasoline costs to keep increasing while becoming less confident about their future finances, discretionary purchases may face greater scrutiny.
That environment can favor companies built around value and essential spending.
Walmart, Costco and other retailers with strong grocery businesses have continued attracting consumers across income groups, while companies relying more heavily on apparel, home furnishings and other discretionary categories may face greater pressure to use promotions.
The same dynamic could matter during the upcoming holiday season.
Deloitte expects U.S. holiday retail sales to grow between 4% and 4.8% this year, potentially reaching $1.7 trillion or more.
But higher nominal spending does not necessarily translate into equally strong unit growth when prices remain elevated.
Consumers may spend more dollars while buying roughly the same amount of merchandise.
Fed Expectations Are Nearly Evenly Divided
The survey arrives at a particularly sensitive moment for financial markets.
Fed futures are assigning roughly a 60% probability to a quarter-point interest-rate increase at the September 16 meeting, which would raise the federal funds target range from its current 3.50%-3.75%.
The remaining probability points toward no change.
Economists are more cautious.
A Reuters poll released this week found that a majority still expects the Fed to leave rates unchanged in September and through the remainder of 2026, although the number forecasting at least one additional increase has risen.
That disagreement between financial markets and economists illustrates how uncertain the decision has become.
Only a few weeks ago, investors were more confident that the Fed could remain on hold as inflation showed signs of cooling.
Since then, stronger employment data, renewed energy inflation and hawkish comments from some Fed officials have shifted the balance.
The consumer-expectations survey does not resolve that debate.
Instead, it reinforces both sides.
One-year inflation expectations remaining at 3.6% provide ammunition for officials worried that price pressures are becoming persistent.
The sharp increase in unemployment expectations and deterioration in household finances provide a reason for caution.
Oil Above $100 Raises the Stakes
The latest market developments have made the inflation side of the equation even more difficult.
Brent crude has returned above $100 as the U.S.-Iran conflict threatens shipping and energy supplies.
The energy shock helped push the 10-year Treasury yield toward 4.84% this week, near its highest level since 2023.
U.S. stocks also declined Wednesday, with the S&P 500 falling about 0.5%, while energy was the only major sector to finish higher.
For investors, those moves show how quickly inflation concerns can spread across asset classes.
Higher oil prices can increase expected inflation.
Higher expected inflation can push bond yields upward.
Higher bond yields increase borrowing costs for businesses and households while reducing the relative attractiveness of highly valued stocks.
Mortgage rates can also face renewed upward pressure when long-term yields increase.
That is why the consumer-expectations data matter beyond economic surveys. They feed into the same inflation narrative currently driving Treasurys, equities, housing and Federal Reserve expectations.
Friday’s CPI Report Could Decide the Debate
The next major test arrives almost immediately.
The Bureau of Labor Statistics is scheduled to release August producer-price data Thursday morning and the Consumer Price Index on Friday.
Economists expect headline CPI to rise roughly 0.4% from July, with core inflation increasing approximately 0.2%.
The distinction between headline and core inflation will be important because energy costs have risen sharply.
A strong headline number driven largely by gasoline could concern markets without necessarily convincing every Fed official that underlying inflation is accelerating.
A hotter-than-expected core number would be more difficult for policymakers to dismiss.
The Fed then begins its two-day meeting on September 15, with the rate decision coming September 16.
The University of Michigan’s preliminary September consumer survey is also due Friday, giving investors another read on whether inflation expectations have changed since oil climbed above $100.
Those reports may be more consequential than the August New York Fed survey because they will capture at least part of the economic environment that developed after August ended.
The New York Fed’s numbers nevertheless establish the starting point.
Consumers entered September expecting inflation of 3.6% over the next year and 3% even five years from now. They were also more worried that unemployment would rise, less confident about finding another job and more pessimistic about their financial situation.
The Fed now has to decide which risk demands the stronger response.
Friday’s CPI report could determine whether policymakers conclude that inflation remains the greater threat—or whether signs of a more nervous consumer and softer future labor market are enough to keep interest rates unchanged for another meeting.