Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Sticky Price Illusion In The September Data
Transcript
- Lucas: Look at the New York Fed’s report from last week. They pointed out that inflation on many everyday items was entirely due to tariffs, which suggests a structural shift rather than just demand-pull pressure. Luna: Right, so we are seeing supply-side cost pushes getting baked into retail prices permanently. Lucas: Exactly. And if you look at the broader data for October eleventh, the ten-year breakeven inflation rate has ticked down to two point three three percent, yet the Core PCE price index remains sticky at one hundred thirty point five. Luna: That disconnect is what keeps me up at night. Why isn't the breakeven rate falling faster if growth is slowing? Lucas: Because the labor market is still providing enough wage support to keep those tariffs in place. Unemployment is at four point two percent, and average hourly earnings for private sector workers have risen to thirty seven point eight dollars. Luna: But job openings dropped to seventy thousand seventy nine thousand in August. That’s a clear cooling signal. Lucas: It is cooling, but it’s not collapsing. We need to understand how businesses are absorbing these costs right now. Are they cutting jobs or just raising prices? Because the CPI is still at three hundred thirty four point one. Luna: If they are raising prices, then the consumer has less purchasing power, which should eventually hit payrolls. Lucas: That’s the lag effect we are dealing with today. Real GDP growth slowed to two point two percent annualized in the second quarter, down from two point five percent. Luna: So growth is decelerating, but prices aren't following suit yet. It feels like a plateau. Lucas: A very expensive plateau. Let’s look at the S&P 500. It closed at seven thousand eight hundred twelve yesterday, up half a percent over the week. Luna: Markets seem to be pricing in a soft landing, but I’m not sure the underlying data supports that optimism fully. Lucas: I agree. The Russell twenty hundred is down one point four percent over the same period. Small caps are feeling the pinch of borrowing costs more acutely. Luna: And the Fed Funds effective rate is sitting at three point seven five percent. That’s a heavy burden for companies with high leverage. Lucas: Which brings us back to the tariff issue. If importers are paying more, they pass it on. But if consumers stop buying because wages aren't keeping up, those prices become unsustainable. Luna: Do we have evidence that consumers are actually pulling back on discretionary spending? Lucas: Not explicitly in this dataset, but the initial jobless claims dropped slightly to one hundred ninety seven thousand. That suggests layoffs aren't spiking, which means employment is stable but not growing. Luna: Stable employment with stagnant real wage growth creates a specific kind of vulnerability. Lucas: It does. You see it in the grocery aisles. People trade down to generic brands, but the baseline cost of living has shifted upward permanently. Luna: So the 'sticky' part of inflation isn't just services anymore. It's goods too, thanks to these trade policies. Lucas: Precisely. And the Federal Reserve has to watch this closely. The FOMC will be looking at whether this tariff-induced inflation is transient or entrenched. Luna: Given the bond market reaction, with the ten-year yield at five point two four percent, investors seem skeptical that the Fed can tame it easily. Lucas: They are demanding higher yields because they don't trust the central bank to override political decisions on trade. Luna: It’s a classic conflict between monetary policy and fiscal trade policy. One tries to cool demand, the other raises supply costs. Lucas: And until those two align, we are going to see this weird hybrid of slow growth and persistent price pressure. Luna: It reminds me of the stagflation fears of the seventies, though obviously the dynamics are different now. Lucas: Different, but the psychological impact on the consumer is similar. They feel poorer even if their nominal paycheck hasn't changed much. Luna: That’s the danger zone for any administration trying to manage public sentiment during an election year. Lucas: Or just post-election. The economic reality doesn't care about the calendar. Luna: True. So where do we go from here? Does the labor market finally crack under the weight of these prices? Lucas: I think we might see a gradual realization by employers that they can’t raise wages enough to match inflation without killing margins. Luna: Which would force them to cut hiring, accelerating the decline in job openings we saw in August. Lucas: That seems like the most likely path. A slow grind downward in demand, followed by a correction in prices. Luna: It’s a painful adjustment, but maybe necessary to reset the baseline. Lucas: Maybe. Or maybe we just accept a new normal of higher costs and lower growth. Luna: Either way, the next few months of job data will tell us which version of reality we are living in. Lucas: Agreed. Keep your eye on the nonfarm payrolls and that average hourly earnings number. They are the canary in the coal mine. Luna: Absolutely. One more turn on this before we wrap up. Lucas: You know, walking through the economy with us has made something click, especially when we unpack how these invisible trade costs affect your weekly budget. Luna: We deliberately don't run ads on these deep dives. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Lucas: Yeah, and honestly, that direct support helps us keep digging into these messy data points without worrying about advertiser pushback. Luna: It makes a real difference in how deep we can go on topics like this. Lucas: Thanks for being part of that. Now, back to the data. Luna: So, if the labor market cracks as we suspect, do you think the Fed will step in aggressively to stabilize things? Lucas: I doubt it. They are already watching inflation closely. They might wait to see if the tariff effects fade naturally before acting. Luna: That’s a risky bet if the unemployment rate starts ticking up again. Lucas: It is. But that’s the tightrope they are walking on right now. Luna: Let’s hope they find their footing soon. Until next time, stay sharp.