Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Tariff Inflation Trap Hitting Everyday Prices
Transcript
- Lucas: There is a quiet contradiction playing out in the data right now that most headlines are missing. We have the New York Fed explicitly stating that inflation on many everyday items was entirely due to tariffs this week, yet our core personal consumption expenditures price index is still sitting at one hundred thirty point five as of early August. Luna: Right, so the headline numbers might be misleading if we don't look at what is actually driving those costs for consumers. It feels like we are seeing a structural shift rather than just cyclical noise. Lucas: Exactly. The thing is, when you isolate the tariff component, you see that it isn't broad-based demand pulling prices up anymore. It is a supply-side friction hitting specific categories hard. If you look at the ten-year breakeven inflation rate, which dropped slightly to two point three three percent yesterday, the market is pricing in long-term stability, but the reality on the shelf tells a different story. Luna: That disconnect between market expectations and actual grocery or retail bills is where people get frustrated. Are we seeing this in the wage data too? Lucas: We are, and it connects directly to the labor side. Average hourly earnings in the private sector ticked up to thirty seven dollars and eighty cents in September, but nonfarm payrolls only added twenty nine thousand new jobs between August and September. That suggests companies are paying more to retain staff while hiring slows down, partly because the cost of goods sold has become unpredictable. Luna: So businesses are absorbing some of that tariff hit through margins, but passing others to consumers, while simultaneously tightening their hiring. It sounds like a squeeze from both ends. Lucas: Precisely. And look at the JOLTS report from August, where job openings fell to seven million seventy nine thousand from seven million three hundred thirty five thousand. That drop signals employers are becoming cautious. They aren't expanding capacity because they don't know if input costs will stay elevated next quarter. Luna: It makes sense that they would pause expansion when the cost of raw materials becomes political rather than purely economic. Does this change how you view the Federal Reserve's current stance? Lucas: It complicates it significantly. The effective federal funds rate is currently at three point seven five percent, and interest on reserve balances is at three point nine zero percent. The Fed is trying to manage aggregate demand, but tariffs create a supply shock that monetary policy can't easily fix without crashing the economy. Luna: Because raising rates further would hurt growth, but keeping them low lets inflation stick around in those tariff-affected sectors. It feels like a policy blind spot. Lucas: It is a blind spot for traditional models. When you look at real GDP growth annualized at two point two percent, down from two point five percent earlier in the year, the economy is slowing. But core CPI is still at three hundred thirty seven point eight. You have stagnation in growth coupled with sticky prices in specific baskets. Luna: Which basket exactly? I mean, everyone notices food and energy, but the New York Fed said 'everyday items.' What does that include for the average listener? Lucas: It largely refers to durable goods and imported consumer staples. Things like electronics, certain clothing lines, and household appliances that rely heavily on global supply chains. If a tariff hits a key manufacturing hub, the markup gets applied immediately at the wholesale level, and retailers pass it on within weeks, not months. Luna: So the lag time we usually expect with inflation is basically gone for these goods. Consumers feel the pain instantly instead of waiting for wages to catch up. Lucas: Exactly. And that erodes purchasing power faster than the unemployment rate would suggest. The unemployment rate is at four point two percent, up slightly from four point one percent. That sounds stable, but combined with rising prices in those specific categories, real disposable income is taking a hit. Luna: I wonder if this explains why initial jobless claims dropped to one hundred ninety seven thousand last week. Maybe people are staying in jobs they don't love because finding new ones means risking that income during a period of price volatility. Lucas: That is a very sharp observation. Labor mobility drops when uncertainty rises. People hold onto current paychecks even if wages aren't growing fast enough to offset tariff-induced inflation, simply because the risk of switching is too high when the macro environment is this fragmented. Luna: It’s a defensive posture for workers. Do you think the Fed will adjust its outlook based on this tariff-specific inflation, or do they ignore it as a temporary fiscal issue? Lucas: They tend to ignore it publicly because it is outside their mandate, but privately, it changes their calculations. The fact that the VIX is volatile and the Russell twenty small caps are down one point four percent over the last five days shows investors are nervous about margin compression. Small companies are less able to absorb tariff costs than large multinationals. Luna: So the inequality effect here is twofold: big corps survive, small businesses struggle, and consumers pay more. It feels like a systemic fragility building up. Lucas: It is. And remember, nominal GDP is now at thirty two trillion five hundred sixty three billion dollars, but real GDP is only twenty four thousand four hundred eight billion. The gap between nominal and real growth highlights how much value is being lost to price increases rather than actual production gains. Luna: That’s a crucial distinction. Growth looks fine on paper until you strip out the inflation premium. So what’s the practical takeaway for someone listening who wants to protect their finances right now? Lucas: Diversify away from assets that are purely domestic and exposed to immediate import shocks. Look at sectors with strong pricing power or domestic supply chains. Also, keep liquidity handy because if the Fed hesitates to cut rates due to this sticky inflation, borrowing costs will remain elevated longer than the market expects. Luna: High cash balances become a safer bet than leveraged bets in this environment. You’re essentially waiting for the tariff winds to change direction before committing capital. Lucas: Correct. Patience is the premium asset right now. We’ll see if the ten-year Treasury yield, currently at five point two four percent, holds steady or dips further as the market reassesses the inflation outlook. For now, the data says: watch the imports, watch the margins, and don’t assume the Fed will fix what Congress starts. Luna: It’s a reminder that policy decisions in Washington ripple all the way down to the checkout aisle. Thanks for breaking this down, Lucas. Lucas: Always happy to dig into the details. If walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, your support really helps us keep digging into the numbers so you aren't left guessing. It allows us to spend more time verifying these sources. Lucas: We appreciate every single listener who tunes in and shares the show. It builds the community that makes this possible every single day. Luna: Absolutely. Back to the charts then. Lucas: So, looking ahead to the next quarterly earnings season, do you think companies will use tariffs as an excuse for lower guidance, or will they try to hide it behind operational efficiency? Luna: Probably a mix. Tech giants might blame supply chains, while retailers will likely focus on volume declines. It will be interesting to see which narrative wins out in the boardrooms. Lucas: I suspect we will see a lot of vague language about 'macro headwinds' that conveniently cover multiple issues at once. Transparency is rare when margins are under pressure. Luna: Well, hopefully the New York Fed report gives us a clearer lens to filter through that corporate speak next time. Lucas: Let’s hope so. Until then, keep an eye on those import indices. They are the leading indicator for what your wallet will feel next spring.