Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Energy Shocks Lock In Stagflation
Transcript
- Lucas: If walking through the economy with us has made something click, remember that a couple of dollars a month is genuinely what keeps these going. You can support the show directly at buy me a coffee dot com slash fexingo. Luna: Thanks for tuning in. It’s always good to know the infrastructure behind the insights stays intact. So, Lucas, we’ve been talking about stagflation as a slow-burn problem, but today’s headlines feel more like a sudden jolt. Lucas: Exactly. The standard narrative for the last two years has been that services inflation would grind down while goods deflated. But now we are seeing a classic supply-side shock hitting right where it hurts most: energy. With the estimated bill sitting at one thousand seven hundred dollars per household due to oil volatility, the dynamic has shifted from sticky services to volatile inputs. Luna: One thousand seven hundred dollars is a massive hit to disposable income. Does that level of shock actually change how the Federal Reserve or the Bank of England should be thinking about rates? Lucas: It complicates everything because it creates a dual pressure. On one side, you have the inflationary spike from fuel and transport costs. On the other, you have the demand destruction as consumers pull back from non-essentials. Look at the latest CPI print from early September. The all urban consumer index is at three hundred thirty four point one, which is still ticking up from three hundred thirty two point eight in August. It’s not crashing. Luna: So the numbers aren't moving in the direction policymakers want. And yet, the Bank of England just left rates unchanged on Thursday, defying the expectation of a hike lead from the Fed. Lucas: Right. That decision by the Bank of England to hold steady tells you they are seeing the same thing I am: the risk of killing growth outweighs the immediate need to crush this specific type of inflation. They know that raising rates further against an energy shock doesn't make oil disappear; it just makes borrowing more expensive for businesses already squeezed by high input costs. Luna: But if they don't hike, doesn't that anchor inflation expectations higher? We saw UK inflation jump to three point one percent specifically because energy costs soared. Lucas: That is the trap. When energy drives inflation, it becomes harder to tame with interest rates alone. Interest rates work on credit demand. They do not work on physical supply constraints or geopolitical disruptions. If your main cost driver is fuel, raising the prime rate is like trying to put out a fire with a hose that has no water. You are squeezing the wrong variable. Luna: So we are looking at a scenario where inflation stays elevated not because wages are spiraling, but because the cost of moving things around the world has structurally increased. Lucas: Precisely. And this ties back to our earlier conversations about transport costs. This time, however, it is not just a logistical bottleneck; it is a price shock. Transport companies are sounding alarms on fuel prices, calling the situation science fiction because the volatility is so extreme. When freight costs go up, every single product that relies on shipping gets a new floor price. Luna: Does that mean we should expect to see this reflected more strongly in the Core PCE than in the headline number? Or is it the other way around? Lucas: Actually, it’s often the opposite in the short term. Headline CPI gets hammered by energy and food. Core PCE excludes those, so it looks calmer. But here is the kicker: Core PCE is still at one hundred thirty point seven, up from one hundred thirty point three four in July. That means even without energy, there is underlying friction. The energy shock is leaking into core categories via transportation and production costs. Luna: That leakage is dangerous because it makes the inflation feel permanent rather than temporary. Consumers start to adjust their behavior permanently. Lucas: Yes, and that behavioral shift is what keeps stagflation alive. When people realize that gas and shipping will always be more expensive, they stop saving for discretionary purchases. Look at the real GDP growth for the second quarter of twenty twenty six. It was only one point five percent annualized, down from two point one percent. The economy is slowing exactly as the price pressure accelerates. Luna: One point five percent growth is barely above the pace of population growth. That is stagnation. How does this impact the labor market, which has been surprisingly resilient? Lucas: The labor market is lagging. Unemployment is at four point one percent, flat from August. Nonfarm payrolls added about one hundred sixty thousand jobs, but job openings are rising slightly to seven thousand two hundred seventy one thousand. This suggests employers are hesitant to hire aggressively because their margin compression is too severe. They are waiting for clarity on energy prices before expanding headcount. Luna: So we have a freeze in hiring despite low unemployment. That sounds like a recipe for wage stagnation, which usually helps cool inflation, but maybe not in this case. Lucas: Correct. Average hourly earnings are at thirty seven point eight dollars, up from thirty seven point six five. Wage growth is softening, but it is not collapsing. If wages stay rigid while energy costs rise, businesses have to choose between absorbing the cost and passing it on. Most will pass it on, which restarts the wage-price spiral, just driven by energy instead of labor. Luna: This feels very different from the post-pandemic inflation we analyzed last year. Back then, it was about excess savings and pent-up demand. Now it is about scarcity and cost-push. Lucas: That is a crucial distinction. Cost-push inflation is much harder to fix with monetary policy. You cannot lower the federal funds rate to create more oil fields or open more shipping lanes. The solution has to be fiscal or structural, or simply a wait and see approach until the geopolitical tension eases. Luna: And given the current geopolitical climate, especially with the Iran war implications mentioned in the headlines, do you think we are going to see a significant easing soon? Lucas: I doubt it. The ten-year breakeven inflation rate is sitting at two point three three percent, flat from yesterday. Markets are pricing in that this higher inflation regime is persistent. Investors are not betting on a quick return to two percent. They are preparing for a longer period of moderate-to-high inflation. Luna: Two point three three percent might sound small, but for long-term bond holders, that erosion of purchasing power is significant. How are markets reacting to this uncertainty right now? Lucas: Gold is up to four thousand three hundred eighty one dollars, and silver is jumping three point five percent to sixty five point seventy one dollars. Investors are fleeing to hard assets because fiat currency is losing its stability relative to tangible commodities. The S&P five hundred is down point three percent over the last five days, showing some fatigue in equities as earnings forecasts get revised downward. Luna: So capital is rotating out of growth stocks and into defensive commodities. That is a classic stagflation signal. What about the dollar? Is it holding up against this backdrop? Lucas: The dollar is mixed. The Dow is down one point five percent over the week, while the Nasdaq is slightly up. Tech is somewhat insulated from direct energy costs, but industrials and materials are getting crushed. The market is punishing the sectors that rely heavily on cheap energy inputs. Luna: It seems like the only winners are the energy producers and the precious metals miners. Is that a sustainable allocation strategy for investors? Lucas: For now, yes. But it is risky. If the global economy slows enough to trigger a recession, demand for oil could collapse regardless of supply constraints. We are walking a tightrope. The Bank of England holding rates is a bet that growth won't crash immediately. If they are wrong, we could see a sharp correction in both stocks and bonds. Luna: A sharp correction would be painful, especially for households already eating that one thousand seven hundred dollar energy penalty. Do you think consumers have any buffer left? Lucas: The buffer is thin. Initial jobless claims dropped to one hundred ninety six thousand, which is good news for employment, but it also means fewer people are getting laid off to cut expenses. Households are likely drawing down remaining savings or increasing credit card debt to cover the energy hike. Once savings hit zero, consumption drops, and that drags GDP down further. Luna: Which brings us back to that one point five percent GDP growth. If consumption drops, does that force the Fed to cut rates aggressively? Lucas: They might be forced to pivot, but they will be hesitant. Cutting rates during an inflation spike can be politically disastrous and economically destabilizing if it triggers a second wave of price increases. They are likely to wait for clearer signs that the energy shock is transitory before making any moves. Luna: Waiting is a luxury when people are struggling to pay their bills today. It feels like the disconnect between policy tools and economic reality is widening. Lucas: It is widening rapidly. We are seeing a mismatch where monetary policy is blunt, but the problem is surgical and physical. Until the geopolitical situation stabilizes or alternative energy sources scale up significantly, we are stuck in this awkward middle ground. Luna: So the takeaway for listeners is that diversification into hard assets and defensive sectors isn't just a hedge anymore; it's a necessity. Lucas: Exactly. And keeping liquidity available is key. If a recession does hit alongside this inflation, cash will be king for those who have it. For everyone else, it’s going to be a year of careful budgeting and watching those energy prices closely. Luna: One final question on the horizon: do you think other central banks outside the US and UK will follow the Bank of England’s lead and hold steady? Lucas: Likely. The IMF and ECB are watching these dynamics closely. If the US holds, Europe and Asia will feel less pressure to hike independently. We might see a coordinated pause across major economies, which could stabilize currencies but leave inflation stubbornly high for another twelve months. Luna: Twelve months of that is a long time for anyone living paycheck to paycheck. Thanks for breaking this down, Lucas. Lucas: Anytime. The key is to watch the breakevens and the gold prices—they are telling us what the future holds better than any press release.