Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why the Fed's Preferred Inflation Gauge Still Rising While CPI Falls
Transcript
- Lucas: So the latest CPI came in at 332.6 for June, down from 333.98 the month before. That's a clear drop. But here's the thing the Fed actually watches—the PCE price index—it moved the other way, up to 131.5 from 130.94. Luna: Wait, so one says inflation is falling and the other says it's rising? How is that possible? Lucas: Different baskets, different weights. CPI measures out-of-pocket spending for urban consumers—things like rent, gas, groceries. PCE includes everything in the economy, even portions paid by employers or the government, and it adjusts for substitution more quickly. Luna: So which one is more accurate for everyday people? Lucas: CPI is what you feel at the register. But PCE is what the Fed uses to set policy. Right now, the gap tells a story. Core PCE, which excludes food and energy, went from 129.67 to 130.1—that's a 0.3% month-over-month rise. The Fed wants that around 0.2% or lower. Luna: So what's pushing PCE up while CPI falls? Any specific category? Lucas: Import prices from China just hit their highest level since 2008. That directly feeds into PCE because it includes a broader set of imported goods. Also services like healthcare and insurance—PCE captures more of those, and they're still climbing. Luna: That explains a lot. I just got my health insurance renewal notice and it jumped way more than I expected. Lucas: Exactly. And you know, it's conversations like this that keep me grounded. Actually, a handful of listeners chip in each month to keep this whole thing ad-free. That's why we can spend time on these nuances instead of rushing through sound bites. Luna: Yeah, if you've found this useful, buying a coffee at buy me a coffee dot com slash fexingo is a simple way to support the show. No pressure, but it really does keep us independent. Lucas: So back to the Fed's problem. With the Fed funds rate at 3.63% and PCE still ticking up, they can't cut rates. But the economy is showing some soft spots—small-cap stocks are down slightly, and the Russell 2000 slipped 0.1% over the past five days. Luna: So are we stuck at 3.63% for a while? The 10-year breakeven inflation is at 2.26%, down from 2.28%—markets seem to expect a slow decline. Lucas: Right. And the Fed's recent language, especially from Governor Warsh, has been parsed phrase by phrase. They're signaling patience, but if PCE keeps rising, they might have to reverse course. Luna: What about the tariff news? Trump's new global tariff on certain goods—could that push import prices even higher? Lucas: Absolutely. And the planned generic drug tariffs from 2028—those would hit a part of the basket that's been keeping medical costs down in CPI. PCE would catch that increase sooner. Luna: So the divergence isn't going away anytime soon. What should listeners watch next? Lucas: The next PCE report due out next week. That's the one that really moves the needle for policymakers. If it shows another month of acceleration, the timeline for rate cuts gets pushed further out. Luna: And for our wallets—CPI might keep dropping, but if PCE stays sticky, the Fed won't ease. That means mortgage rates stay high, car loans stay expensive. Lucas: Exactly. It's a reminder that inflation isn't one number. It's a collection of stories, and the story the Fed reads is different from the one we feel at the grocery store.