Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Inflation Numbers Feel Wrong
Transcript
- Lucas: If walking through the economy with us has made something click, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Luna: It really does help keep the research deep. And honestly, if you enjoy the show, that’s the best way to keep it going. Lucas: Thanks. Let’s get back to the numbers. The headline story this week is that inflation looks like it’s finally cooling. Core CPI came in at three point zero percent year-over-year in August, which is well below the peaks we saw two years ago. But if you’re standing in the checkout line at your local grocery store or paying your insurance premium, that number feels completely abstract. Luna: Exactly. The official gauge says one thing, but my wallet says another. Why is there such a massive disconnect? Lucas: The disconnect comes down to what economists call the 'feel' factor versus the statistical basket. The Bureau of Labor Statistics uses a fixed basket of goods and services to calculate CPI. But people don’t consume a fixed basket. When gas prices drop, we might drive more. When food prices stay high, we switch brands or cut portions. The index captures the price change of a static list, but your life adapts dynamically. Luna: So the index is measuring a theoretical average, while I’m dealing with the specific prices of the things I actually buy. Lucas: Right. And those specific items are often the ones where prices are stickiest. Look at the PCE price index, which the Fed prefers. It rose to one hundred thirty-one point six in August. That’s an increase, but it’s slower than before. However, the components driving that increase are not things that are volatile. They’re things like healthcare, insurance, and housing. Those sectors don’t have the rapid price corrections we see in electronics or used cars. Luna: Healthcare and insurance are basically mandatory expenses. You can’t just stop buying them because the price went up. Lucas: Precisely. And that’s the second layer of the problem: inelasticity. If the price of wheat goes up, I might buy less bread. If the price of my health insurance deductible goes up, I still need coverage. The lack of substitution options means these categories drag on your personal inflation rate much harder than they drag on the headline CPI. Luna: That makes sense. So even if the overall number drops, the parts I care about most stay high. Lucas: Exactly. And there’s a third factor: the lag effect. Services inflation, which includes things like rent and medical services, moves slowly. It takes months for a new lease agreement to reflect current market rents. It takes time for hospitals to adjust billing codes. So even if today’s supply chain shocks are gone, the prices you pay today are locked in by contracts signed six or twelve months ago. Luna: So we’re essentially paying for last year’s economy. That’s a tough pill to swallow. Lucas: It is. And look at the labor market context. The September jobs report showed only twenty-nine thousand jobs added, with unemployment rising to four point two percent. That slowdown suggests demand is cooling, which should eventually push prices down. But right now, wages aren’t growing fast enough to offset the accumulated price hikes of the last three years. Luna: So people are squeezed from both sides. Prices are still high, but income growth is stalling out. Lucas: Correct. The real wage growth is barely positive in many sectors. When you combine stagnant income with sticky service prices, the result is that your purchasing power isn’t recovering as fast as the inflation data suggests. You’re seeing lower inflation, yes, but you’re not seeing falling prices. Deflation would be relief. Stagnant high prices are just exhausting. Luna: It’s a slow bleed rather than a sudden injury. Much harder to plan for. Lucas: Right. And consider the housing component. Even though home prices have stabilized, rent inflation remains elevated in many markets. The core CPI excludes energy and food, but it heavily weights shelter. Shelter makes up nearly a third of the index. Until new construction catches up with household formation, that weight will keep dragging the number up. Luna: I’ve noticed that in my own city. New apartments are expensive, and older units are raising rents every time they turn over. Lucas: That’s the turnover effect. Landlords reset prices based on current demand, not historical averages. So even if the broader market cools, individual landlords might raise rents because their costs — property taxes, insurance, maintenance — haven’t dropped. Those costs are also sticky. Insurance premiums, for instance, hit all-time highs this summer due to climate risks. Luna: So the costs feeding into the inflation measure are themselves inflating. It’s a feedback loop. Lucas: A vicious one. And here’s the kicker: the Federal Reserve is watching the ten-year breakeven inflation rate, which sits at two point three six percent. That’s slightly above their two percent target. It tells investors that they expect inflation to remain persistent. The Fed funds rate is currently around three point seven five percent, and while that’s restrictive, it might not be restrictive enough to crush those sticky service prices. Luna: So the central bank is trying to cool the economy without crashing it, but the damage to living standards is already baked in. Lucas: Baked in for now. The key question is whether the labor market softening, like that forty-two percent unemployment rate, will finally force businesses to lower prices to attract customers. But historically, once prices go up, they rarely come back down significantly. They just stop going up as fast. Luna: So we’re looking at a long period of 'zero inflation' for many goods, rather than deflation. That’s not exactly a celebration. Lucas: No, it’s not. It means your cost of living stays high indefinitely. You don’t get your old purchasing power back unless wages grow faster than prices for several years. And given that core PCE is still at one hundred thirty point five, that gap is wide. Luna: What can consumers do? Is there any leverage left in the system? Lucas: You have to be hyper-selective. Since services are the problem, look for ways to reduce exposure to those specific categories. Shop around for insurance. Consider alternative healthcare providers. But fundamentally, you’re waiting for the lag effect to work. The prices you pay today are determined by decisions made in late 2025. Luna: So patience is the only strategy? Wait for the cycle to turn? Lucas: Patience, and maybe some adjustment in expectations. The era of rapidly rising prices is over, but the era of cheap money and cheap living is likely paused. The S&P 500 is rallying toward seven thousand seven hundred seventy-eight, driven by tech and AI optimism. But stock market gains don’t lower your grocery bill. They only help if you hold those assets. Luna: Which brings us back to inequality. Those who own stocks see wealth grow; those who spend cash see their margins shrink. Lucas: Exactly. The macro numbers are improving, but the micro reality is harsh for renters and salaried workers without significant equity. The two point three six percent breakeven rate confirms that markets expect stability, not relief. We’re heading into a prolonged period of normalization. Luna: Normalization sounds polite, but it feels like a grind for everyday people. Lucas: It is. And that’s why the gap between the CPI print and your personal experience matters. Don’t trust the headline alone. Look at the services component. Look at your rent. Look at your insurance. Those are the true indicators of your financial health right now. Luna: Practical advice. Focus on the categories you can control, even if the broader trend is slow. Lucas: Control what you can. And remember, the Fed is watching the data closely. With the next jobs report coming Friday, any further weakness could push rate cuts sooner, which might ease borrowing costs but won’t instantly fix your rent. Luna: So we watch the labor data, we manage our budgets, and we wait for the lag to catch up. Lucas: We wait, and we stay informed. Because the story isn’t just about inflation falling; it’s about who bears the cost while it falls. And that’s a conversation worth having every week.