Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Supply Chain Friction Fuels Stagflation
Transcript
- Lucas: If walking through the economy with us has made something click, it’s because we’re trying to decode exactly where the pressure points are hiding right now. And today, September eighteenth twenty twenty six, those pressure points look less like a sudden shock and more like a slow, grinding friction in the gears of global trade. Luna: Right, and unlike the一九七零s where an oil embargo was the singular villain, today’s friction is multi-layered. We have transport companies sounding alarms on fuel prices while consumers are already hit by a one-two punch of oil costs and interest rates. Lucas: Exactly. The headline number that matters here isn’t just the CPI at three hundred thirty four point one, or even the core PCE sitting at one hundred thirty point seven. It’s the fact that real GDP growth has decelerated to one point five percent annualized while nominal GDP keeps creeping up. That divergence is the textbook definition of stagflationary pressure. Luna: So you’re saying the engine is still running, but it’s burning more fuel to go slower? Lucas: That’s a fair way to put it. The problem is that the fuel cost isn’t just gasoline at the pump. It’s embedded in everything from shipping containers to last-mile delivery. When you look at the recent headlines about transport companies flagging fuel prices, you’re looking at a pass-through mechanism that bypasses productivity gains. Even if tech companies like NVIDIA or Alphabet are squeezing out efficiency, that savings gets eaten up before it reaches your wallet if logistics costs rise. Luna: It reminds me of the Japan yen intervention earlier this week—when currency fluctuations hit import costs, the lag time for those price changes to show up in retail is getting shorter. Lucas: Yes, and the Bank of England leaving rates unchanged while the Fed signals caution shows how fragmented the global response is. In the UK, inflation jumped to three point one percent largely due to energy costs soaring. Here, we see similar dynamics but masked by a slightly stronger dollar initially, though gold is up one point five percent and silver is up five point four percent over the last five days, suggesting investors are pricing in persistent monetary uncertainty. Luna: Gold going up while stocks are mixed tells me the market isn’t sure if this is a soft landing or a hard stall. Lucas: Precisely. And what makes this cycle different from previous recessions is the labor market’s rigidity. Unemployment is flat at four point one percent, but average hourly earnings are up to thirty seven point eight dollars. That wage growth is necessary for workers, but when combined with high energy and transport costs, it creates a cost-push inflation loop that doesn’t respond quickly to demand destruction. Luna: So businesses can’t just cut prices because their input costs won’t drop? That sounds like a margin squeeze waiting to happen. Lucas: It is a margin squeeze, but many large-cap companies have absorbed some of that via scale. However, the small and mid-caps, which drive most employment, are feeling the pinch harder. Look at the JOLTS data: job openings are up to seven thousand two hundred seventy one thousand. Employers are competing for workers in an environment where every worker costs more due to wage pressures and overheads like energy. Luna: And initial jobless claims are down to one hundred ninety six thousand, so people aren’t quitting en masse yet, which keeps wages sticky. Lucas: Correct. Sticky wages plus sticky goods prices equals a prolonged period of sub-optimal growth. The ten-year breakeven inflation rate is sitting at two point three three percent, flat recently, but that stability is deceptive. It means the market expects inflation to persist at a moderate level rather than spike or crash, which is actually more dangerous for long-term planning. Luna: Deceptive because it lulls policymakers into thinking they have time, but the underlying mechanics are shifting. Lucas: Yes. And consider the sector rotation we’re seeing. The Dow is down one point four percent over the last five days, while the Nasdaq is up one point three percent. This flight to quality in technology suggests investors are betting that digital firms can insulate themselves better from physical supply chain shocks than industrial or consumer discretionary firms. Luna: But even tech relies on hardware and data centers, which need massive amounts of power and cooling—both vulnerable to energy price spikes. Lucas: Absolutely. That’s the hidden link. AI productivity paradoxes, which we’ve discussed before, are real, but they don’t negate the fact that building and running these systems requires physical infrastructure. If energy costs soar due to geopolitical tensions, like the ongoing impacts of the Iran war affecting oil supplies, then even the most efficient code becomes expensive to execute. Luna: So the digital economy isn’t immune to the physical world’s friction; it’s just delayed in showing it. Lucas: Exactly. And this brings us to the household impact. Estimates suggest the estimated bill for consumers is one thousand seven hundred dollars per household due to oil and rates. That’s not abstract macroeconomics; that’s reduced discretionary spending, which feeds back into lower GDP growth, completing the stagflationary circle. Luna: One thousand seven hundred dollars is enough to wipe out any sense of financial progress for many families, making them even more sensitive to price hikes. Lucas: Which makes demand elasticity collapse. People buy the essentials regardless of price, so companies don’t need to compete on price, allowing markups to persist. This is why core services inflation remains the real trap—it’s less tied to volatile goods prices and more tied to labor-intensive activities that can’t be automated away overnight. Luna: Healthcare, education, hospitality—all sectors where wages drive costs directly, and there’s no substitute for human labor. Lucas: Right. And if you look at the Canadian trade war angle we covered recently, tariffs and border frictions add another layer of inefficiency. Every hour a container sits at a port or every invoice delayed by regulatory checks adds cost. These aren’t one-time shocks; they’re recurring taxes on commerce. Luna: So the solution isn’t just cutting rates, because lower rates don’t fix broken supply chains or reduce energy dependency. Lucas: They don’t. In fact, aggressive rate cuts could weaken the currency further, importing more inflation. The Fed is walking a tightrope. They need to cool demand enough to stop wage-price spirals but not so much that they trigger a recession deep enough to cause mass layoffs, which would then create social and political instability. Luna: A difficult balance. It feels like we’re managing decline rather than growing out of it. Lucas: Managing complexity is a better term. We’re adapting to a new normal where growth is structurally slower and prices are structurally higher. The question for investors isn’t whether inflation will vanish, but how to position portfolios for a decade of this environment. Luna: That shifts the focus from timing the bottom to selecting assets that thrive on friction, like logistics operators or energy producers. Lucas: Or defensive consumer staples, since demand for basics remains resilient. But ultimately, the story here is about the erosion of purchasing power through multiple channels simultaneously. It’s not just food or housing anymore; it’s the entire cost structure of moving and powering things. Luna: So when we talk about stagflation, we’re really talking about a systemic tax on efficiency that hasn’t been fully priced in yet. Lucas: I think that’s the key insight. Efficiency gains are being taxed by friction. And until those friction points—geopolitical, logistical, or energetic—are resolved, we’re likely to see this pattern continue. Luna: It’s a sobering thought, but a necessary one to keep our expectations realistic about short-term relief. Lucas: If walking through the economy with us has made something click, it’s because we’re trying to decode exactly where the pressure points are hiding right now. And honestly, having this conversation ad-free allows us to dig into the nuances without interruption, which I know you appreciate. Luna: Yeah, and keeping the lights on for these deep dives takes resources, so a couple of dollars a month genuinely helps us stay independent and thorough. If you want to support that, check out buy me a coffee dot com slash fexingo. Lucas: It really does make a difference in the quality of research we can bring to you. Thanks for considering it. Luna: Back to the data—the nonfarm payrolls showed modest gains, but the real story is in the composition of those jobs and the wages attached to them. Lucas: Right. So as we look ahead, the key metric to watch isn’t just unemployment, but the relationship between wage growth and productivity. If wages rise faster than productivity, inflation stays alive. If productivity leaps ahead, it could finally break the cycle. Luna: Until then, we’re stuck in the grind. Let’s see if the next quarter’s GDP print confirms this stagnation or if something unexpected shifts the needle. Lucas: Whatever happens, the structure of the economy has changed. Recognizing that shift is the first step to navigating it.