Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Service Inflation Is Reshaping Your Budget
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, you might want to consider supporting that choice directly. We deliberately don't run ads on these shows because we believe financial advice should be free of commercial pressure. If you want to help keep it that way, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Yeah, it really does make a difference when the conversation stays focused on your interests rather than advertiser metrics. Lucas: Thanks for being part of that ecosystem. Now, let's look at what's actually happening to your wallet right now. The headline number everyone watches is the Consumer Price Index, which just came in at 336.3 last month. But if you're feeling like prices are still rising faster than your paycheck, you're not imagining things. The real story isn't in the headline; it's buried in the core CPI, which measures everything except food and energy. Luna: And core CPI is sitting at 338.9, so it's actually running hotter than the headline figure? Lucas: Exactly. And more importantly, the composition of that heat has changed dramatically over the last two years. Back in twenty twenty-three, inflation was largely driven by supply chain snarls and the cost of physical goods. You were paying more for cars, appliances, and furniture. Today, the inflation engine has flipped. It's no longer about the stuff you buy; it's about the services you use. Luna: So we're seeing sticky prices in healthcare, housing, and personal services while goods deflation stabilizes? Lucas: Precisely. Look at the ten-year breakeven inflation rate, which is currently at 2.32 percent. Markets are pricing in a slow but persistent rise. When you dig into the service sector, you see that labor is the dominant input. You can't automate a plumber, a nurse, or a teacher as easily as you can automate a widget factory. That means service inflation is inherently tied to wage growth, and right now, wages are rising just enough to keep prices up, but not enough to give consumers breathing room. Luna: It feels like the 'shrinkflation' narrative is outdated because this is literally 'service-flation'—charging more for the same level of human effort. Lucas: That's a sharp way to put it. And here is the concrete detail most people miss: the Federal Reserve's preferred gauge, the Core PCE price index, is at 130.5. It's been creeping up from 130.13 in August. The Fed Funds effective rate is at 3.75 percent, and the daily rate is hovering around 3.88 percent. The central bank is trying to cool demand, but they are fighting a structural shift in how the economy produces value. When labor becomes the scarcest resource, its price goes up, and that gets passed directly to you in the form of higher fees for repairs, consultations, and care. Luna: So if I'm trying to protect my purchasing power, standard savings accounts aren't cutting it anymore since the interest rates are barely above zero for most retail products. Lucas: Right. A standard checking account is essentially a wealth evaporator in this environment. You need to understand that your cash is losing value not just because prices are rising, but because the opportunity cost of holding idle cash is skyrocketing relative to short-term yields. However, simply moving money to a high-yield savings account doesn't solve the problem if your expenses are rising at five percent while your yield is four percent. You're still losing ground in real terms. Luna: But at least you're minimizing the bleed? Or do you suggest taking more risk to chase higher returns? Lucas: I suggest matching your asset duration to your liability duration. Most people treat their emergency fund as a static pile of cash. Instead, view it as a short-term bond ladder. With the ten-year Treasury yielding roughly in line with those breakeven rates, you can lock in returns that at least track the long-term inflation expectation. It's not about getting rich quick; it's about refusing to lose to the system. Luna: Locking in yields sounds safe, but doesn't that expose you to interest rate risk if the Fed cuts rates unexpectedly later this year? Lucas: That's a fair concern. If rates drop, the market value of existing bonds rises, which is actually good for your portfolio balance sheet, even if you have to reinvest at lower coupons. But for most listeners, the bigger risk is staying fully invested in equities during a period of service-led inflation. Stocks often struggle when input costs rise faster than pricing power, especially in the small-cap space. The Russell 2000 is up 1.8 percent over the last five days, showing some resilience, but the volatility in the Nasdaq tells a different story about tech margins under pressure. Luna: So the strategy shifts from aggressive growth to defensive income generation and liquidity management? Lucas: For the core of your portfolio, yes. Think about dividend aristocrats—companies with decades of raising payouts. They tend to have pricing power. If a company can raise prices by three percent every year without losing customers, that's a direct hedge against service inflation. Look at sectors like utilities, healthcare, and consumer staples. They aren't flashy, but they are structural hedges against the very specific type of inflation we are living through right now. Luna: It's interesting how the Goldman Sachs and JPMorgan reports are highlighting AI stock booms, yet the average person is worried about their car insurance premiums. Lucas: That disconnect is the key. The AI boom is driving capital markets, but it's not immediately translating to lower consumer prices. In fact, the energy demands of data centers are adding to infrastructure costs, which feeds back into utility bills. So while the S&P 500 is near 7,639, your actual cost of living is being driven by local labor markets and regulatory constraints. You can't invest your way out of a bad local policy environment, but you can invest your way into assets that benefit from national trends. Luna: So diversification isn't just about owning more stocks; it's about owning stocks that behave differently in a service-inflationary environment? Lucas: Exactly. Traditional value investing principles apply here. Companies with strong balance sheets and low debt are better positioned to weather higher borrowing costs. The Fed Funds rate is stable at 3.75 percent, but the cost of new debt is higher. Highly leveraged companies will see their earnings compressed. Meanwhile, companies with pricing power pass those costs to consumers. Your job is to identify which side of that equation your investments sit on. Luna: Does this mean we should be avoiding growth stocks entirely until inflation cools? Lucas: Not avoiding, but weighting. Growth stocks are sensitive to discount rates. When inflation expectations are sticky, long-term discount rates stay elevated, which hurts the present value of future cash flows. That's why you see the Nasdaq underperforming the Dow recently. It's not a crash; it's a rotation toward quality and cash flow. For the individual investor, this means rebalancing toward companies that generate free cash flow today, not promises for tomorrow. Luna: That's a practical shift. It moves the focus from speculation to solvency. Lucas: Solvency is the foundation. Now, let's talk about a specific action item. Review your fixed expenses. How much of your monthly budget is locked into contracts with automatic annual increases? Cable, insurance, software subscriptions. These are all service inputs. Negotiate them annually. Use the competitive landscape to your advantage. If one provider raises rates by five percent, switch to another. In a service-heavy inflation environment, frictionless switching is your only leverage. Luna: Most people don't realize how much money they leave on the table by auto-renewing those service contracts every single year. Lucas: They don't, because the pain of switching feels worse than the pain of a small price hike. But over five years, that five percent annual increase compounds significantly. It's a silent tax on inertia. Pair that behavioral fix with a portfolio tilt toward high-quality dividend payers, and you create a dual-layer defense against service inflation. Luna: So it's about controlling what you can—the negotiation—and optimizing what you can't—the macro environment. Lucas: Exactly. You can't control the CPI, but you can control your exposure to it. Keep your cash reserves in instruments that yield at least the current inflation rate. Hold assets that can raise prices. Avoid high-debt liabilities. And remember, the goal isn't to beat inflation by twenty percent; it's to preserve your real wealth so you can maintain your lifestyle when the cycle eventually turns. Luna: That's a much more sustainable mindset than trying to find the next ten-bagger during a volatile quarter. Lucas: Survival is the prerequisite for success. As we close out October twenty twenty-six, watch those service-sector wage reports. If they start to decouple from productivity, we'll likely see a shift in Fed policy sooner than expected. Until then, stay liquid, stay diversified, and keep negotiating. Luna: Agreed. Protecting your purchasing power is the first step to building real wealth.