Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Wholesale Prices Are Screaming
Transcript
- Lucas: Headline inflation feels manageable right now, doesn't it? You look at the consumer price index data for September, and sure, it ticked up slightly to three thirty-six point three, but it isn't accelerating. The markets seem to think the worst of the post-pandemic price shocks are behind us. But I've been staring at a different number all morning, one that suggests the ground is still shaking beneath our feet. Luna: You mean the wholesale data? Because if producer prices are spiking, that usually translates directly into higher sticker prices for us consumers a few months down the line. Lucas: Exactly. The Producer Price Index for September showed wholesale prices jumping by six point three percent annually. That is the biggest annual gain we have seen since twenty twenty-two. When you compare that to the core consumer price index rising only one point one percent over the same period, there is a massive disconnect forming in the supply chain. Luna: Six point three percent is huge for intermediate goods. It means businesses are absorbing costs they can't pass on yet, or they are preparing to raise prices aggressively once inventory clears. Lucas: Right, and here is the thing most people miss about the PPI. It measures prices received by domestic producers for their output. So when you see that six point three percent jump, it is not just raw materials. It includes energy, food, and core goods. If a manufacturer like a home appliance maker or a furniture company sees their input costs rise that fast, they eventually have to raise retail prices to maintain margins. Luna: So we are looking at a delayed inflation event? The pain hasn't hit the checkout counter yet because retailers are eating the difference? Lucas: That is one possibility, but another is that demand is simply so weak that they cannot raise prices without losing sales. However, with the U.S. budget deficit swelling to almost two trillion dollars for fiscal twenty twenty six, the government is essentially flooding the economy with debt-financed spending. That liquidity has to go somewhere, and historically, it ends up pushing up the cost of production before it hits the consumer. Luna: It feels like the Federal Reserve is flying blind on some of these metrics. They are watching the CPI, which looks calm, while the underlying mechanics of production are getting more expensive. Lucas: The Fed definitely has a lag problem. Interest rate policy takes eighteen to twenty-four months to fully impact the real economy. So even though the effective federal funds rate is sitting at three point seven five percent, and the daily rate is holding steady at three point eight eight percent, those rates were set based on earlier data. They don't account for this sudden six point three percent whiplash in wholesale costs. Luna: And Kevin Warsh is out there suggesting the Fed could surprise everyone in October. If PPI keeps running hot, does that force a hawkish hold or even a hike? Lucas: A hike seems unlikely given how much market volatility we have already seen. The S&P five hundred dropped two percent over the last five days, and the Nasdaq is down four point two percent. The equity markets are already pricing in a risk-off scenario. A rate hike would likely crash credit markets further. But a hold becomes less comfortable when you realize that core PCE, the Fed's preferred gauge, is still ticking up. Luna: Core PCE was at one thirty point five in August, up from one thirty point one three. It is slow, but it is persistent. How does that square with the idea that inflation is defeated? Lucas: It squares poorly. It suggests that the disinflationary process stalled in the third quarter. And when you add the PPI spike into the mix, you get a very clear picture: services are sticky, goods are volatile, and wholesale pressures are building. This is why your grocery bill feels stubborn despite the cooling headline inflation numbers we discussed in previous episodes. Luna: Because the factory gate prices are moving faster than the store shelf prices. There is a transmission lag that leaves consumers thinking things are cheap until the next restock cycle. Lucas: Precisely. Let's talk about the composition of that PPI jump. Energy prices were a major driver, with crude oil futures hovering around forty-one ninety-two dollars. But even excluding energy, the core producer price index is showing resilience. This isn't just a temporary blip caused by a bad harvest or a supply chain glitch. It is structural. Luna: Structural because of labor costs? Or is it more about the cost of capital? Lucas: Both, but labor is the bigger piece. Wages in the industrial sector have risen significantly, and unlike the early pandemic, workers aren't leaving en masse. Companies are retaining staff, which drives up unit costs. Plus, with the Treasury dismissing IMF debt warnings, there is a clear signal that fiscal dominance is taking over monetary policy. The government needs cheap money to service that two trillion dollar deficit, and the Fed is hesitant to kill the bond market. Luna: So the Fed is trapped. Raise rates too high, and the debt spiral accelerates. Keep them low, and inflation reignites through wholesale channels. Lucas: That is the trap. And it manifests in the breakeven inflation rates. The ten-year breakeven actually dipped slightly to two point three two percent yesterday, which calms some nerves. But that dip might be misleading. Investors are worried about growth more than inflation right now. The Nasdaq drop tells us they fear an earnings recession, not necessarily hyperinflation. But a soft landing is becoming harder to define. Luna: If growth slows and inflation stays sticky, we are heading toward stagflation-lite. That is a terrible environment for fixed income investors and cash savers alike. Lucas: It is. And this brings us back to your personal finance. If you are holding short-term treasuries, you are locking in yields that might not keep pace with the real cost of living next year. The interest on reserve balances is at three point nine zero percent, which sounds good, but if wholesale prices push consumer inflation back toward three or four percent, your purchasing power erodes. Luna: I think many listeners are underestimating the lag effect. They see the CPI cool and assume they can relax their budgets. But the PPI data says otherwise. Lucas: Agreed. The lesson here is to watch the upstream indicators. If you run a small business, you are feeling this PPI squeeze right now. You are seeing your suppliers charge more, and you are hesitating to raise your own prices. Eventually, you will have to make that choice, and it will ripple through the entire economy. Luna: It also makes timing your big purchases tricky. Should you buy now before the pass-through happens, or wait for a potential recession that might force price cuts? Lucas: Waiting is risky if the recession doesn't materialize quickly. Given the fiscal stimulus from the government deficit, demand could remain resilient longer than expected. So, delaying a purchase might just mean you pay a higher price later. Luna: That is a hard pill to swallow. It feels like the game is rigged against the average saver right now. Lucas: It does feel that way. And honestly, if walking through the economy with us has made something click, or if you want to help us keep digging into these complex macro trends without ads, consider supporting us directly. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps the lights on and the research deep. Luna: Yeah, it helps us spend more time on the data rather than chasing clicks. Thanks for listening. Lucas: Back to the data then. The other critical piece of this puzzle is the International Monetary Fund warning that the U.S. debt trajectory is messy and unsustainable. The Treasury dismissed it, but the markets haven't. Gold is sitting at four thousand one hundred ninety-two dollars, and silver is volatile at fifty-seven twenty-eight. Luna: Safe havens are rallying. People are hedging against currency debasement and fiscal irresponsibility. It aligns with the PPI story—we are paying for everything with printed money. Lucas: Exactly. When you combine the two trillion dollar deficit with six point three percent wholesale inflation, you create a feedback loop. The government spends, demand rises, prices rise, wages rise, and the Fed keeps rates elevated to fight it. It is a circular firing squad. Luna: So where do we put our money? Cash is losing value, stocks are volatile, bonds are capped by the Fed's balance sheet constraints. Lucas: Diversification across real assets is key. TIPS, gold, and perhaps equities in companies with strong pricing power. Those are the firms that can raise prices without losing customers, passing the PPI inflation onto you, but protecting their margins and your investment returns. Luna: Pricing power is the ultimate hedge. It is rare, but it is valuable. We should look for those moats in our own portfolios. Lucas: Absolutely. As we head into Q four of twenty twenty six, expect more volatility. The PPI report is a wake-up call. Inflation is not dead; it is just hiding in the wholesale sector, waiting to emerge. Luna: A ghost in the machine. Thanks for keeping us sharp on this, Lucas. Lucas: My pleasure. Stay curious, and keep watching the upstream signals.