Layoff Fears Hit Highest Since Covid Crash As Inflation Expectations Stay Stuck Near 3-Year High: NY Fed Survey
Last month, one-year inflation expectations in the NY Fed's September Survey of Consumer Expectations jumped to the highest since May 2023. This month, they just sat there, waiting for the next catalyst.
According to the October survey released by the New York Fed on Monday, median inflation expectations were unchanged at all three horizons: 3.9% one year ahead (3.91% to be precise, a hair above September's 3.90% and above the 3.8% consensus), 3.3% three years ahead (technically up from 3.25% to 3.29%, which rounds to "unchanged"), and 3.0% five years ahead, where the series has now been parked for the 14th month in a row. If the Fed wanted proof that long-run expectations are "anchored," well, here it is. Just one problem: the anchor sits a full point above the Fed's 2% target.
The survey also showed that disagreement across respondents (the gap between the 75th and 25th percentiles) narrowed at the one- and five-year horizons, while inflation uncertainty eased at the one- and three-year horizons. In other words, consumers are increasingly confident that inflation will stay where it is: around 4%.
Under the hood, the commodity mix shifted. Thanks to cheaper gasoline, expected gas price inflation dropped 0.6pp to 4.2%, food was unchanged at 5.5%, medical care rose 0.1pp to 9.3% and college tuition rose 0.1pp to 7.6%. The big mover was rent, where expected year-ahead increases jumped 0.9pp to 7.7%, up more than a full point since August's 6.6%.
Consumers See 9% Medical Inflation, Goldman Sees Deflation
Which brings us to tomorrow's October CPI, the last one before the Fed's December 9 decision. In its October CPI Preview (available to pro subs), Goldman expects core CPI to rise just 0.16% (vs 0.2% consensus) and headline 0.21% (vs 0.3%), and, curiously, the bank's forecast sees medical services prices falling 0.1%, driven by a 2.5% drop in health insurance as the BLS incorporates updated premium data. Goldman also expects used car prices to fall 1.5% and airfares to be flat (we will have a bigger preview later today).
Contrast that with consumers, who expect medical costs to rise 9.3% and rents 7.7% over the next year. Sure, one is a one-month forecast and the other a year-ahead guess, but somebody is going to be very wrong, and it probably won't be the person paying the rent.
As for what comes after October, Goldman's economists add:
Looking beyond October, we expect monthly core CPI increases of around 0.1% in November and December, reflecting the continued slowdown in the shelter categories and shrinking contributions from tariff-related price increases, as well as continued downward pressure from the health insurance component.
Translation: Goldman sees core CPI running at roughly a 1.2% annualized pace through year-end, which is about one third of what the average American expects for the next 12 months. One more caveat from the bank: the shutdown-related interpolation of last year's missing data has distorted the October seasonal factors, which Goldman estimates will inflate October's seasonally-adjusted core print by 5bps. So if tomorrow's number runs hot, at least part of it will be the BLS's own doing.
Bracing For Layoffs
While inflation expectations went nowhere, the labor market outlook was decidedly mixed, and the headline is not pretty: mean unemployment expectations - the probability that the US unemployment rate will be higher a year from now - rose 1.4pp to 45.3%, the highest reading since April 2020, when the economy was in lockdown and 20 million people had just lost their jobs. That's up from 44.4% in August, which was already the highest since Covid, and more than 11 points above the January 2025 low of 34.0%.
Meanwhile, the perceived probability of losing one's job in the next 12 months rose 0.4pp to 13.9%, still below its 12-month average of 14.3%, while the probability of quitting voluntarily (a proxy for worker confidence) dipped 0.5pp to 19.4%, still above its 12-month average of 18.4%. And in the one bright spot, the odds of finding a new job within three months if one were laid off rose for a second straight month to 46.5%, the highest since November 2025.
Put differently, Americans are more convinced than at any time since Covid that unemployment is going up, while also feeling (slightly) better about their own odds of landing on their feet. Maybe it's the "low hire, low fire, low inspire" labor market in a nutshell: nobody is getting fired, nobody is getting hired, and nobody feels good about any of it.
And nobody seems to have told the hard data. The survey was fielded through October 31, and just days later the BLS reported that October payrolls soared by 165K, above the highest Wall Street estimate, while the unemployment rate dropped to 4.1% and initial claims recently hit the lowest level since 1969. Then again, those same respondents also lived through October's AI rout, which may explain why the odds that stocks will be higher in a year slipped 0.2pp to 40.0%.
The Grads Are Gloomiest
According to the NY Fed, this month's increase in unemployment expectations was driven by those without a college degree: among respondents with at most a high school diploma, the odds rose to 38.6% from 36.4%, and among those with some college to 44.6% from 41.0%.
But the more striking split is in levels: college graduates remain by far the most pessimistic cohort, with 51.1% expecting higher unemployment a year from now, more than 12 points above those with a high school diploma or less. That gap blew out in early 2025 and hasn't narrowed since. Yes, there are many possible explanations, but we'll go out on a limb and guess that the white-collar workers who spend their days watching AI agents learn to do their jobs are not exactly feeling secure.
Can't Make Minimum
Turning to household finances, the picture was, in the NY Fed's own words, "mixed." Median expected household income growth slipped 0.1pp to 3.0%, median earnings growth expectations were flat at 2.6% (just below the 12-month average of 2.7%), and expected spending growth dipped 0.2pp to 5.3%, still above its 12-month average of 5.0%. Some napkin math: with earnings expected to rise 2.6% and prices 3.9%, the median American expects a real pay cut of about 1.3% over the next year, and plans to outspend their income growth anyway. What could go wrong?
Well, for one, the average perceived probability of missing a minimum debt payment over the next three months jumped 1.6pp to 13.8%, the highest since December 2025, reversing all of September's improvement and then some. And while credit access perceptions were roughly unchanged, the probability that savings account rates will be higher a year from now rose 1.3pp to 31.6%, the highest since April 2023, a sign that consumers are taking the Fed's recent hiking chatter seriously.
On the perceptions side, things improved slightly: 19.8% of households said they are better off than a year ago (up from 17.9% in September), although the share saying they are worse off also crept up to 42.7% from 42.3%. Looking ahead, 35.6% expect their finances to get worse in the next year, up from 34.5%. Finally, median expected tax increases at current income rose 0.1pp to 3.8%, the highest since December 2025, while expected growth in government debt slipped 0.2pp to 9.7% (which is about the only number in the survey that looks too low).
A Hike Into A Layoff Scare?
All of this lands at an awkward time for the Fed. After holding rates at 3.75%-4.00% last month, a growing number of officials have argued that gradual hikes will be needed to bring inflation back to 2%, and Friday's red-hot payrolls report, as we said at the time, put a December rate hike back in play. A survey showing one-year inflation expectations stuck near 3.9% and the long-run anchor a full point above target will only add fuel to that argument.
The problem is that the same survey shows consumers bracing for the worst labor market since Covid, a rising share expecting to miss debt payments, and real wages they expect to shrink. If Goldman is right and tomorrow's CPI comes in soft, the hawks lose some ammo. If it comes in hot - even with Goldman's 5bp seasonal fudge factor - the Fed may well end up hiking into a consumer who already expects layoffs, which historically has been a pretty reliable recipe for getting them.