Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the New York Fed's Financial Stress Index Rewrites Inflation
Transcript
- Lucas: So there's a survey that the New York Fed runs every four months, called the Survey of Consumer Expectations, and they released the May wave a couple of days ago. The headline that caught my eye wasn't about inflation expectations — it was about financial stress. Luna: The household worries number. I saw that — it hit the highest level since July 2022. That's striking because July 2022 was right after the peak of the inflation shock. Lucas: Exactly. And the context is important. Back then, CPI was running at about 9 percent year-over-year. Now it's around 3.2 percent. Core CPI is higher, but still well off the peak. So the question is: why are households feeling worse about their finances now than when inflation was three times higher? Luna: I think part of it is that the level of prices hasn't come down. The rate of increase slowed, but everything that went up in 2022 is still up. A gallon of milk, a used car, a month's rent — they're all permanently higher. Lucas: That's the level versus rate distinction. CPI measures the change in prices, not the absolute level. So when we say inflation is cooling, we mean prices are rising more slowly. But the cumulative effect since 2021 is still sitting there. And for households that didn't get wage increases that kept pace, the gap feels worse over time. Luna: And the New York Fed survey captures that. It asks about year-ahead expectations for household income, spending, and access to credit. The share of people who think their financial situation will be worse a year from now is up. That's a leading indicator for consumer spending. Lucas: Right, and this is where the macro data gets interesting. On the one hand, the April CPI came in at 332.4, up from 330.29 in March. That's a 0.6 percent month-over-month increase, which was a bit hotter than expected. Core CPI was even stickier at 335.4. So the official inflation narrative is: it's still above the Fed's target, but moving sideways. Luna: But the breakeven inflation rate — the market's expectation for future inflation — is at 2.35 percent as of yesterday. That's actually down from 2.36 the previous day. So bond traders are pricing in inflation staying near where it is, not spiking. Lucas: That's a divergence. The market says inflation will be okay. Households say their finances are stressed. And then you look at what's happening in the stock market over the last five days. The S&P 500 is down 2.7 percent. The Nasdaq is down over 4 percent. Gold dropped 2.7 percent. Even the gold miners index is down over 10 percent in five days. Luna: That's a broad risk-off move. Markets are nervous about something. But what? Tariffs? The U.S. just proposed fresh tariffs on 60 economies over forced labor trade practices. That could reignite supply chain inflation if it escalates. Lucas: And that's the other piece. The New York Fed survey came out the same week as that tariff news. If you're a household already feeling squeezed, the prospect of new tariffs on a wide range of imported goods sounds like more price increases. Even if the actual impact is small, the expectation matters. Luna: The Fed's favorite gauge, the core PCE price index, is at 129.6 in April — up from 129.32 in March. That's a 0.2 percent monthly increase. So the Fed has the data it needs to stay on hold. The effective federal funds rate is 3.63 percent. They're not cutting until they see sustained evidence. Lucas: But here's the tension: if household financial stress continues to rise, consumer spending will eventually slow. And consumer spending is about 70 percent of GDP. So you could get a situation where inflation stays sticky because of supply-side factors like tariffs and service costs, while demand-side weakness builds beneath the surface. Luna: That's the stagflationary echo that keeps coming up. Not 1970s-style, but a milder version — slow growth, persistent inflation, and rising stress. The New York Fed survey is one of the first real-time data points that shows the stress side clearly. Lucas: And it's not just the headline. If you dig into the survey details, you see that expectations about income growth are actually stable. People aren't expecting to earn less. They're expecting to spend more, and they're less confident about getting credit. So the squeeze is coming from the cost side. Luna: That dovetails with what we've seen in episodes on rent and insurance. Those are the big-ticket items that aren't cooling. Rent is still driving core CPI. Car insurance is up double digits year-over-year. Those are hard to avoid. Lucas: If this show is helping you make sense of those connections, that's exactly what we're here for. And one way to keep this ad-free and independent is listener support — if today was useful, buy me a coffee dot com slash fexingo. It genuinely helps us keep doing this. Luna: Yeah, it's a small thing that makes a big difference for us. No pressure, but if you've gotten value from episodes like this one, that link is there. Lucas: So back to the survey. One more number that stood out: the share of households that expect to have trouble making minimum debt payments rose to the highest level since the survey started in 2013. That's not just anxiety — that's a concrete signal of financial strain. Luna: And that's something the Fed watches. If debt stress rises, defaults follow. That could tighten credit conditions further, which is its own kind of economic brake. Lucas: Exactly. And the Fed has a tool for that — the interest on reserve balances rate, which is currently 3.65 percent. They can adjust that to influence bank lending. But they're not going to cut rates just because a survey shows stress. They need to see the data in inflation and employment. Luna: The May jobs report comes out this Friday. ADP reported private payrolls grew by 122,000 in May, which was stronger than expected. So the labor market is still adding jobs. That gives the Fed cover to stay patient. Lucas: But there's another headline from this week: long-term unemployment is surging. The hidden costs there are significant — workers lose skills, employers lose potential talent, and the economy loses potential output. That's another stress point that doesn't show up in the monthly headline job number. Luna: So we've got this mosaic: a hot CPI, a patient Fed, a nervous stock market, a stressed consumer, and a labor market that looks okay on the surface but has cracks underneath. The New York Fed survey ties it all together because it's asking the consumer directly. Lucas: And that's the angle. Most inflation coverage focuses on the data and the Fed. But the lived experience of inflation is shaped by expectations, by stress, by the feeling that the ground is shifting under you. The survey captures that. Luna: I think one underreported piece is that the survey also asks about home price expectations. That matters because shelter is the biggest component of CPI. If households expect home prices to keep rising, that feeds into rent expectations, which feeds into core inflation. Lucas: And home prices are still elevated. The S&P 500 might be down, but the housing market hasn't crashed. That's partly because of demographics and partly because homeowners with low mortgage rates are locked in. So supply is constrained, and that keeps prices up. Luna: Which brings us back to the Fed's dilemma. If shelter costs stay high, core CPI stays sticky. The breakeven inflation rate at 2.35 suggests the market thinks the Fed will eventually get inflation down. But if household stress leads to a consumer pullback, that could bring inflation down faster than the Fed expects. Lucas: And that would be a demand-side disinflation, which is different from the supply-side improvement we've been hoping for. It's the 'bad' kind of disinflation — the kind that comes with a recession. Luna: So the New York Fed survey is a canary in the coal mine. If financial stress keeps rising, it might be the signal that the economy is tilting from 'sticky inflation' toward 'stagnation'. Not yet, but worth watching. Lucas: The next wave of the survey will be out in September. By then, we'll have more data on tariffs, the jobs market, and whether the Fed has made any moves. But for now, the message from households is clear: things feel harder than the official numbers suggest. Luna: And that's the story we'll keep following. Thanks for listening. Lucas: Talk to you next time.