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Last week, the University of Michigan reported that its consumer sentiment index fell below market expectations in October, reaching its lowest point since May’s record low level. In addition, US consumers are becoming increasingly pessimistic on the inflation outlook, expecting inflation to average 3.5% per year over the next five years. Yet today’s chart illustrates that breakeven inflation – the level of inflation expected by bond markets – is holding steady even as consumer inflation expectations remain far above their pre-pandemic average. This suggests that consumers remain more concerned about persistent price pressures than financial markets, potentially weighing on spending decisions. Why this matters: Elevated energy prices and higher borrowing costs are adding to the squeeze, leaving consumer demand vulnerable as confidence weakens. The October Fed meeting will test whether the central bank needs to extend its tightening cycle following September’s rate hike. We expect one further hike this year, followed by a pause as the Fed assesses the cumulative impact of tighter policy.