Americans expect higher inflation, days before the Fed decides

What happened

American households expect prices to rise 4.7% over the next 12 months, up from 4.6% in September. Asked about the next five to ten years, they expect inflation of 3.5% a year, up from 3.4%. Both are the highest readings since May, and both rose for a second month in a row. The University of Michigan published the final October results of its monthly consumer survey on 23 October.

The survey’s overall index of consumer sentiment was 48.0, almost unchanged from 48.1 in September and the lowest in five months. A year ago it stood at 53.6. The survey’s director said worries about purchasing power, what people’s money can buy, continue to dominate how consumers see the economy.

Why expectations matter as much as prices

Inflation expectations are what people think prices will do in the future. They matter because people act on them. A worker who expects prices to rise 4.7% will ask for a bigger pay rise. A firm that expects its costs to rise will raise its own prices sooner. Enough of this, and the expected inflation starts to arrive.

That is why central banks want expectations to stay “anchored”: close to the 2% target, whatever happens to prices this month. Short-term expectations usually follow what people see in shops and at the petrol pump, so a jump in oil lifts them quickly. The long-run figure matters more. If people start to believe inflation will stay high for years, a temporary shock can become a lasting one.

October’s long-run reading of 3.5% is above the 2.8% to 3.2% range it moved in during 2024, according to the survey. The year-ahead figure is well above the 3.4% recorded in February, before the conflict with Iran began.

Why higher rates show up in the same survey

The survey also shows the other side of the mechanism. Consumers’ view of current conditions fell by about 8% from September, and the whole fall came from their view of buying big items such as cars and appliances, which dropped 18%. Respondents blamed higher interest rates and affordability. This is how higher rates are meant to work: by making borrowing dearer, they cool spending, and with it the pressure on prices.

Where it sits in the chain

This is link 1, inflation, seen through what people expect rather than what they pay today. Actual US inflation was 3.7% in September. The next step is link 2, the central bank’s reaction. The Federal Reserve raised its target range to 3.75–4.00% in September and decides again on 28 October. Rising expectations are one of the main arguments for keeping rates high, even as a sell-off in technology shares has made markets more nervous about growth.

What to watch

• The Fed’s decision and statement on 28 October, and whether they mention inflation expectations.
• PCE inflation for September, the Fed’s preferred measure, on 29 October.
• The preliminary November survey from the University of Michigan on 6 November.