Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / What Your Coffee Habit Reveals About Inflation
Transcript
- Lucas: If you bought a latte every weekday last year, you probably noticed the price creeping up. But here's the thing — that daily coffee is actually a pretty good window into how inflation really hits your wallet, versus what the headline CPI numbers say. Luna: I know my local shop raised prices twice in the past year. First they went from $4.50 to $4.75, then a few months later to $5 even. It feels small each time, but it adds up. Lucas: Exactly. And that's the kind of granularity that the official numbers can miss. The May CPI came in at 4.2 percent annualized — highest in three years, as of yesterday's report. But when you look at how consumers actually experience inflation, it's often through these small, repeated price changes on things they buy regularly. Luna: Speaking of small amounts adding up — a couple of dollars a month is genuinely what keeps these episodes ad-free and independent. If you've gotten something out of the show, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. And it lets us keep digging into these stories without any outside pressure. So, back to that latte — let's talk about what that $0.50 increase actually means in inflation terms. Luna: Okay, so if my coffee went from $4.50 to $5.00, that's an 11 percent increase. But the overall CPI is only 4.2 percent. Why the gap? Lucas: Great question. The CPI is a basket of thousands of goods and services, weighted by how much the average household spends on each. Coffee has a pretty small weight in that basket — maybe a fraction of a percent. So even if coffee prices jump 11 percent, it barely moves the headline number. But for someone who buys coffee daily, that increase is very real. Luna: Right, so the headline CPI smooths out a lot of the volatility. But what about the things that have bigger weights — like rent or car insurance? Lucas: Those are the heavy lifters. Shelter alone is about a third of the CPI. And we've seen shelter costs stay elevated, which is one reason core CPI — which excludes food and energy — is still sticky. Core CPI in May was 336.1, up from 335.42 the month before. That's still rising. Luna: So when the Fed looks at core CPI, they're really focused on that shelter component. But for households, it's the combination of everything — the rent going up, the insurance going up, and yeah, the coffee too. Lucas: Exactly. And the New York Fed just released a survey showing household worries over finances hit their highest level since July 2022. That was a period when inflation was much higher — over 8 percent. So even though headline inflation is lower now, people are feeling more anxious. Why? Because the cumulative effect of these price increases is piling up. Luna: Let's put some numbers on that. If you spend $5 on coffee every weekday, that's $100 a month. If the price goes up 11 percent, you're paying an extra $11 a month. Over a year, that's $132 more just for coffee. Lucas: And that's just one item. Now multiply that across dozens of purchases — groceries, gas, utilities, streaming services. Each one might be up 5 or 10 percent. Individually, they seem manageable. Collectively, they squeeze the budget. Luna: So is there a way to measure this cumulative effect more accurately? I know there are alternative inflation indexes, like the ones that track 'everyday inflation' or use real-time price data. Lucas: There are. The MIT Billion Prices Project, for example, scrapes online prices daily. And the Fed has its own measure — the PCE price index — which uses a broader basket and updates weights more frequently. The PCE for April came in at 130.9, up from 130.38. That's a 0.4 percent monthly increase, which annualizes to about 4.8 percent. A bit higher than CPI. Luna: So PCE is actually running hotter than CPI right now? Lucas: It has been. And that's important because the Fed officially targets PCE, not CPI. So if PCE is running around 4.8 percent, that's well above their 2 percent target. And the 10-year breakeven inflation rate, which is a market-based measure of expected inflation, is at 2.33 percent — down a bit from 2.35 recently. That suggests markets expect inflation to moderate, but not quickly. Luna: So the markets think inflation will cool, but households are still feeling the pain. That disconnect is interesting. Lucas: It is. And it might explain why the Fed is staying put. The effective federal funds rate is 3.63 percent as of May, and the daily rate is 3.62 percent. They've held steady for a few months now. They're waiting to see if the data confirms that inflation is sustainably moving down. Luna: But if PCE is at 4.8 percent, that doesn't look like it's moving down fast enough. Lucas: No, it doesn't. And the jobs report coming this Friday could add another piece to the puzzle. If wage growth stays strong, that could keep pressure on services inflation — which is the stickiest part right now. Luna: Let's go back to that coffee example. If wages are rising, maybe the coffee shop owner raises prices to cover higher labor costs. That's the services inflation channel. Lucas: Exactly. And that's why the Fed is so focused on the labor market. If wages rise too fast, businesses pass those costs on to consumers, and you get a wage-price spiral. We haven't seen that yet, but it's a risk. Luna: So for the average person listening, what's the takeaway? Should they expect prices to keep rising, or is relief in sight? Lucas: I think the honest answer is: it depends on the category. Some goods, like used cars, have actually been deflating — prices are falling. But services, especially shelter and medical care, are still rising. The Fed's path to 2 percent inflation is going to be slow. The breakeven rate suggests it'll take a couple of years. Luna: So in the meantime, that latte might not get any cheaper. But maybe the rate of increase slows down. Lucas: Right. And that's the best case scenario — disinflation, not deflation. Prices keep going up, but more slowly. For households, that means the budget squeeze continues, but maybe not as intensely as last year. Luna: One thing I found interesting: the New York Fed survey also showed that people's expectations for inflation one year from now have actually come down a bit. But their concerns about their current financial situation are up. So there's a disconnect between near-term outlook and current reality. Lucas: That's a really good point. People might think inflation will moderate, but they're still dealing with the cumulative price level being higher. Even if inflation slows, prices don't go back down — they just rise more slowly. So your purchasing power has already taken a hit. Luna: And that's why the coffee example is so powerful. It's not about the 4.2 percent headline; it's about the 11 percent you actually pay. Lucas: Exactly. So next time you see a CPI report, remember: it's an average. Your personal inflation rate depends on what you buy. If you're a renter who drives a lot and drinks coffee, your inflation is probably higher than the headline. Luna: And if you're a homeowner who works from home and doesn't buy much, you might be feeling it less. That's the distributional effect. Lucas: Right. And that's something we should talk about more — how inflation hits different income groups differently. But that's for another episode. Luna: For now, I think the key is: keep an eye on your own basket. The national numbers are useful, but your wallet tells the real story. Lucas: Well said. And we'll keep tracking those numbers for you. Thanks for listening to Inflation Explained with Fexingo.