Consumers are expecting more inflation alongside a stronger job market

The New York Fed released its latest snapshot of consumers’ expectations for the future of the economy, and it’s a mixed bag.

Inflation expectations — how much folks think prices will have risen by a year from now — were up sharply in September to 3.9%. On the flip side, consumers were feeling a bit better about the job market last month. They think they’re less likely to lose their job in the coming year; if they do, they feel more likely to find another one.

Last month, consumers saw one price keep going up at nearly every street corner they passed, said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank: “The increase in inflation expectations in September — it’s gas prices and also diesel prices, which consumers don’t usually pay, but have been in the news a lot.”

“With the higher price of gasoline, consumers are telling us they’re more worried about making ends meet,” he said. “That has flowed through to lower expectations of household finances.”

Consumers now expect food prices to rise more than 5%, rent nearly 7%, and medical care more than 9%. Of course, they may not turn out to be right about any of that.

But that’s somewhat beside the point for the Federal Reserve when it decides whether to raise interest rates again, said financial market economist Oren Klachkin at Nationwide.

Rising inflation expectations are “definitely part of the reason why they chose to hike rates last month, and why we think they are going to continue to raise interest rates,” he said.

If the Fed lets those expectations continue unchecked, “that could certainly have an impact on spending habits,” Klachkin said.

When consumers expect higher prices and rush to make purchases to get ahead of them, that can drive even more inflation, making the Fed’s job of fighting it harder.