Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Hidden Tax of Your Inflation Expectations
Transcript
- Lucas: Look, if you walked into a grocery store yesterday and looked at the produce section, you probably felt that familiar pinch in your stomach. The numbers are technically cooling, but the feeling hasn't left our wallets. We've been tracking the headline CPI, which is up to three hundred thirty-four point one now, but I want to talk about something much more subtle today: the gap between what prices are doing and what people think they'll do next. Luna: Right, because the data says one thing but my bank account feels another. Are you talking about those recent reports from Goldman Sachs about consumer sentiment being in the dumps? Lucas: Exactly. It’s the classic case where the macroeconomy looks fine—GDP is growing, employment is steady—but the micro-level experience is brutal. Goldman Sachs actually pointed to 'lower happiness' as a key driver behind this sentiment slump. They’re arguing that even though the economy isn't contracting, the psychological weight of persistent services inflation is making people feel poorer than they statistically should be. Luna: That’s fascinating because usually when headlines say the economy is solid, people just shrug and go back to work. Why is the mood so different this time around in September of twenty twenty-six? Lucas: It comes down to stickiness. When goods prices dropped after the supply chain shocks of the early twenties, everyone breathed a sigh of relief. But services? Insurance, healthcare, housing, repairs—that stuff doesn't drop. Look at the Core CPI, which strips out food and energy. It’s holding at three hundred thirty-seven point eight. That number is stubbornly high because labor costs are baked into every service transaction, and wages don't fall easily. Luna: So we aren't seeing deflation in the things that matter most to our daily lives, like rent or medical care, which keeps the pressure cooker pressurized even if the stove flame is turned down slightly. Lucas: Precisely. And here is the kicker for investors and everyday people alike: the market is pricing in that discomfort. If you look at the ten-year breakeven inflation rate, which tells us what the bond market expects inflation to average over the next decade, it’s sitting at two point three three percent. It ticked down very slightly from two point three four, but it’s hovering right around that critical threshold where consumers start acting defensively. Luna: Two point three three percent sounds manageable on paper, but when your rent goes up five percent and your insurance premium jumps another four, that average doesn't feel like it applies to you. Lucas: It absolutely doesn't. This is where behavioral economics takes over. When people expect prices to keep rising, they change their behavior. They buy less durable goods, they delay big purchases, and they save more cash even if interest rates are decent. We saw this with the transport sector earlier this month when companies sounded alarms on fuel prices, creating a ripple effect that made logistics costs feel unpredictable again. Luna: I remember reading that article about the transport companies. It wasn't just about gas prices; it was about the uncertainty. People hate uncertainty more than they hate high prices sometimes. Lucas: Spot on. And that uncertainty feeds back into the CPI. If businesses expect higher input costs, they raise prices preemptively. If consumers expect higher prices, they demand higher wages. It creates this feedback loop that keeps the Core PCE price index, our preferred inflation gauge, stuck at one hundred thirty point seven. The Federal Reserve is watching this closely, especially with the Fed Funds effective rate holding flat at three point six three percent. Luna: But if the Fed isn't moving rates, are they worried that keeping them stable will let these sticky service prices run wild? Lucas: They’re in a bind. If they hike too fast, they risk crushing the job market, which hurts sentiment further. If they wait too long, inflation expectations anchor higher. The Bank of England actually defied the Fed recently by leaving rates unchanged, signaling that many central banks are trying to find a soft landing without causing a recession. But for us, the listeners, it means the status quo is going to feel uncomfortable for a while longer. Luna: It really highlights how disconnected the headline number is from the lived experience. Most people still remember when a gallon of milk was under four dollars, and comparing that to today skews their entire perception of value. Lucas: That’s the reference point bias. We compare everything to the low points of the past few years rather than the long-term trend. But there’s a practical takeaway here. Understanding that services inflation is sticky helps you budget differently. You stop looking for bargains on things that won't get cheaper, like home repairs or childcare, and you focus your savings goals on volatile categories like travel or electronics, where prices might actually soften. Luna: That’s a smart shift in strategy. Instead of fighting the current, you work with the reality of which sectors are frozen and which are fluid. Lucas: Exactly. And if walking through the economy with us has made something click about how these invisible forces shape your wallet, the way these stay ad-free is listener support. If today was actually useful to you, consider buying me a coffee dot com slash fexingo. It’s the best way to keep us digging into these deeper economic threads for you. Luna: Yeah, we appreciate it. It lets us spend more time analyzing the data instead of worrying about overhead. Lucas: Back to the data, then. Let’s look at the gold market, which often acts as a barometer for these same fears. Gold futures are down two point three percent over the last five days, trading at four thousand three hundred twenty-three dollars. That’s a notable dip. Luna: Usually gold goes up when people are scared of inflation or currency devaluation. Is this drop a sign that confidence is returning? Lucas: Not necessarily. It’s more likely profit-taking after the rally we saw earlier in the year. But notice how the S&P 500 is up almost a percent in the same window. Investors are rotating back into equities, betting that the Fed can manage the transition. However, the Dow Jones Industrial Average is down half a percent, showing that large-cap industrials are feeling the drag of those same transport and energy costs we mentioned. Luna: So the market is split. Tech is rallying on NASDAQ gains of two percent, while traditional industry stocks are lagging. It mirrors the divide between services and goods we were just discussing. Lucas: It’s a perfect mirror. Technology companies have better margins to absorb wage hikes, whereas manufacturing and logistics are squeezed on both sides. This divergence is why you see the Russell 2000, which tracks small caps, down over a percent. Small businesses don't have the pricing power of big tech, so they eat the cost. Luna: That makes sense. Small businesses are the backbone of employment, so if they’re struggling with margins, it could eventually hit hiring, which would cool the whole economy faster than anyone expects. Lucas: Or it could lead to consolidation. We’re already seeing trends where smaller players get bought out by larger ones who can negotiate better freight rates. It’s a structural shift that happens during prolonged periods of elevated cost pressures. Luna: Speaking of structural shifts, did you catch the news about France’s wine production nearing a seventy-year low? It’s an extreme example, but it shows how climate and cost intersect. Lucas: I did read that. Winemakers are facing tough choices because droughts reduce yield while labor costs remain high. It’s a microcosm of the broader agricultural inflation story. When supply contracts and costs rise, prices spike. But unlike tech, you can’t just innovate your way out of a bad harvest overnight. Luna: Right. And since wine is a luxury good, the wealthy might not feel the pinch immediately, but it signals trouble for the middle-class consumer who treats it as an occasional indulgence. Those indulgences disappear first when budgets tighten. Lucas: Which brings us back to sentiment. The disappearance of discretionary spending is a leading indicator. When people stop buying wine, or nice dinners, or new furniture, the services sector starts to slow down. That’s how inflation finally cools—not because the Fed cut rates, but because demand simply evaporated. Luna: So the cycle completes itself through exhaustion rather than intervention. That’s a sobering thought for anyone hoping for a quick fix. Lucas: It is. But understanding the mechanics helps you prepare. If you know that services are sticky, you lock in long-term contracts where you can. If you know goods are volatile, you wait for dips. It’s about agency in a system that feels out of control. Luna: Agency is exactly what’s missing from most financial advice. Everyone tells you what to buy, not how to think about the environment you’re buying in. Lucas: Well said. We’ll leave you with that thought. As we head into the rest of the quarter, watch those core metrics, not just the headlines. The real story is always in the details.