Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How May's CPI Jump to 4.2 Percent Reshapes Your Budget
Transcript
- Lucas: So the May CPI number landed yesterday — four point two percent annual headline inflation. That is the highest reading in three years, and it's not just a statistical quirk. Luna: Yeah, I saw that. And it's not exactly what the markets wanted to see, given the Fed is still holding rates around three point six percent. Lucas: Right. The headline CPI index itself hit 334.0, up from 332.41 the month before. And core — excluding food and energy — actually ticked higher too, to 336.1. So the idea that inflation is cooling broadly just isn't matching the data. Luna: What's driving it this time? Because we've done episodes on rent, on car insurance, on service inflation — this feels like something a bit different. Lucas: Energy is absolutely a factor. You saw the headlines — energy prices taking center stage globally, especially with the ECB about to decide on rates. But there's also something quietly happening in household expectations. Luna: The New York Fed survey that came out this week — financial worries at the highest since July 2022. Lucas: Exactly. That survey is a forward-looking measure. When people feel worse about their finances, they tend to pull back spending, which should cool inflation — but instead, we're seeing prices keep rising. It's a weird standoff. Luna: So is the Fed stuck? They've been at this holding pattern for months. The effective fed funds rate is 3.63, and the daily rate is flat at 3.62. No movement. Lucas: They're stuck because cutting now would risk reigniting the very price pressures they've been trying to tame. But holding also means that households continue to feel squeezed. The ten-year breakeven inflation rate — which is basically the market's expectation for average inflation over the next decade — is at 2.34 percent. That's up slightly from 2.33. Luna: So the bond market isn't convinced inflation is going away either. Lucas: Not yet. And the PCE price index — the Fed's preferred gauge — was at 130.9 in April, up from 130.38. Core PCE also rose. So all the major inflation thermometers are pointing in the same direction. Luna: Let's talk about what 4.2 percent actually means for someone listening. Like, if your grocery bill was $500 a month last year, it's now $521. That's real money. Lucas: It is. And the thing that's frustrating is that wage growth, while positive, hasn't kept pace for a lot of people. So you're effectively losing purchasing power month over month. The New York Fed survey captures that anxiety perfectly. Luna: And it's not just food and gas. Rent is still elevated, healthcare costs are sticky — we've covered all that. But this CPI print feels like a reminder that the problem hasn't gone away. Lucas: Speaking of which — and I know this is a bit of a pivot — one thing that keeps this show going, without ads, without a paywall, is that a small number of listeners chip in a few bucks each month. It's literally buy me a coffee dot com slash fexingo. Luna: Yeah, it's a really low-key way to support the kind of detailed breakdown we try to do every episode. It keeps us independent. Lucas: Exactly. So if walking through the economy with us has made something click, that's the place. But back to the numbers — because I think there's another layer here that's important. Luna: What's that? Lucas: The composition of this CPI print. Energy was up, sure, but shelter costs are still the single biggest component, and they're still rising. The owners' equivalent rent index, which is what the BLS uses to estimate what homeowners would pay if they rented, continues to climb. Luna: So that's the structural piece that the Fed can't fix with rate policy alone. You can't build houses overnight. Lucas: Right. And that's why the breakeven rate staying above 2.3 percent matters. The market is pricing in that inflation settles a bit above the Fed's 2 percent target, even years out. Luna: So what does that mean for the average person? Higher for longer on rates, higher for longer on prices. Lucas: Pretty much. And the risk is that if expectations become entrenched, it becomes a self-fulfilling prophecy. People start demanding higher wages, businesses pass on those costs, and inflation stays sticky. Luna: Which is exactly why the New York Fed survey matters — it's a measure of those expectations. Lucas: Exactly. And for now, the data is telling us the same story: inflation is not vanquished. The May CPI is a fresh data point, but it's part of a longer trend that started in 2021 and hasn't fully resolved. Luna: So what's the one thing you'd tell someone to watch next? Lucas: Watch the jobs report on Friday. If we see strong wage growth combined with this CPI print, the Fed is going to have a very hard time justifying a cut anytime soon. And watch energy — oil has been volatile, and that flows through to everything. Luna: Yeah, and we'll be here breaking it down as it comes in. Lucas: Absolutely. That's it for today on Inflation Explained. We'll see you next time.