Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Tariff Tax on Your Everyday Groceries
Transcript
- Lucas: If walking through the economy with us has made something click, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: It really does keep the lights on without the ad breaks interrupting our flow. I appreciate the support more than you know. Lucas: Thanks for keeping it running. Now, let's get back to the numbers. The New York Fed released a striking finding earlier this week: inflation on many everyday items was entirely due to tariffs. That is a massive distinction because it separates political policy from organic supply and demand pressures. Luna: Right, because usually when we see grocery prices spike, it's wages or logistics. But if it's purely tariff-driven, that means the pressure is artificial, not structural. Lucas: Exactly. And here is where it gets tricky for the average listener. If you look at the latest CPI data from August, the headline number hit 334.1, up slightly from 332.81. But the core CPI, which strips out food and energy, sat at 337.8. The fact that goods inflation is being driven by tariffs means those core services numbers might actually be underestimating the pain people feel at the checkout counter. Luna: So the official inflation gauge is missing the full picture because it's treating tariff hikes as just another market cost rather than a direct tax on imports. Lucas: Precisely. And the timing matters. We are looking at data from early October 2026, and the Fed Funds effective rate is sitting at 3.75 percent. The Federal Reserve is trying to cool an economy where trade barriers are actively pushing prices up. It's like hitting the brakes while someone else is pressing the accelerator. Luna: That’s a brutal metaphor. But does the consumer actually care about the mechanism? Or do they just see a higher price tag? Lucas: They see the price tag. And that disconnect is dangerous for long-term inflation expectations. Look at the headlines from Wednesday: inflation fears are rising, with the one-year outlook in the Fed survey hitting its highest level since May 2023. When people believe prices will stay high, they change their behavior, and that becomes self-fulfilling. Luna: So even if the tariff is temporary, the psychological impact on spending habits could last much longer. Lucas: You bet. Let's drill into the specific mechanics. When a tariff is imposed on imported goods—say, steel or electronics—the importer pays the tax at the border. They don't just absorb that cost; they pass it directly to retailers, who then pass it to you. It's a direct pipeline from government policy to your pantry. Luna: And unlike a supply chain delay, which might take months to resolve, a tariff is immediate. As soon as the law changes, the price jumps. Lucas: Correct. And here is the nuance most people miss: domestic producers often raise their prices too, even if they aren't importing anything. They use the tariff as cover to increase margins. So the inflation isn't just from the imported good; it's from the entire category shifting upward. Luna: That feels like a windfall for companies but a hidden tax for everyone else. Is there any data showing how much of that margin increase is actually passing through versus being kept as profit? Lucas: It's hard to isolate perfectly, but the NY Fed analysis suggests that in many consumer categories, the pass-through rate is nearly one hundred percent. You're seeing the full brunt of the tariff. And given that the S&P 500 is up 0.5 percent over the last five days to 7,812, investors are already pricing in some of this stability, but the real economy hasn't caught up yet. Luna: So the stock market is calm, but the grocery store is chaotic. That’s a classic divergence. Lucas: It is. And consider the PCE price index, which the Fed prefers. Core PCE was 130.5 in August. If tariffs are inflating the goods component, the core PCE might eventually rise faster than we expect, forcing the Fed to keep interest rates higher for longer. Luna: Which makes borrowing expensive for everyone, from homebuyers to small business owners. It’s a ripple effect that starts at the border. Lucas: Exactly. Now, let's talk about the ten-year breakeven inflation rate. It dipped slightly to 2.33 percent yesterday. On the surface, that looks like markets are calming down. But that metric is forward-looking. It reflects what bond traders think inflation be, not what you paid for milk today. Luna: So the financial markets are betting on a moderate future, while consumers are living in a high-cost present. That mismatch is going to create friction. Lucas: Friction is an understatement. Think about the debt problems flashing warnings in the news. Americans' debt issues are reaching levels not seen since the Great Recession. When prices rise due to tariffs, disposable income shrinks. People max out credit cards to maintain their standard of living, and that debt burden becomes unsustainable. Luna: It’s a vicious cycle. Higher prices lead to more debt, which leads to less spending power, which can eventually slow down the economy so much that the Fed has to pivot aggressively. Lucas: Right. And here is the twist: tariffs are supposed to protect domestic industries. But if they raise input costs for manufacturers, those domestic companies become less competitive globally. So you’re potentially hurting the very sectors you’re trying to shield. Luna: That seems counterintuitive. If I’m buying American-made goods, why would higher import taxes hurt them? Lucas: Because many American manufacturers rely on imported components. If you put a tariff on aluminum, the American company using that aluminum to make cars or appliances faces higher costs. Their prices go up, their margins go down, or they lose market share to foreign competitors who aren't taxed. Luna: So the tariff acts like a penalty on domestic production efficiency. It’s a blunt instrument in a精细 economy. Lucas: A very blunt instrument. And look at the gold price. Gold futures are up 1.4 percent to 4,216. Investors are fleeing to safe havens because they fear policy uncertainty. When trade policy shifts unpredictably, capital moves away from risky assets and toward stores of value. Luna: It’s the market’s way of saying, 'I don’t trust the stability of this economic model.' That kind of sentiment can spread quickly. Lucas: It can. And consider the labor market. The JOLTS data and NFP reports are still critical, but if prices are rising due to tariffs, workers will demand higher wages to keep up. That brings us back to the wage-price spiral we discussed in episode 207, which never quite happened... until now. Luna: So if the tariff shock is large enough, it could reignite that spiral, forcing the Fed into a tighter position than anyone wants. Lucas: Exactly. The Fed Funds daily rate is flat at 3.88 percent, but the pressure is building. Every time a new tariff announcement hits, the calculus changes. The central bank is reacting to policy, not just economic fundamentals. Luna: That feels like a loss of control. The Fed usually sets the tone, but here they’re reacting to Congress or executive orders. Lucas: It is a loss of unilateral control. And that’s why the NY Fed’s report is so important. It highlights that this isn’t just noise; it’s a structural shift in how prices are determined. You can’t ignore a direct tax on consumption. Luna: So for the listener, the takeaway is that low headline inflation numbers might be masking a lot of underlying pressure from trade policy. Lucas: Spot on. And if you’re managing your household budget, you need to watch the goods categories closely. Food, energy, and durable goods are the front lines of this tariff war. Services might stay stable, but your weekly shopping trip will tell the real story. Luna: It’s a reminder that macroeconomics isn’t just about interest rates and GDP; it’s about the actual cost of staying alive in a complex global system. Lucas: Absolutely. And as we move through Q4 2026, keep an eye on those breakeven rates. If they start ticking up despite the Fed’s efforts, it’ll mean the market believes the tariff impact is permanent. And that changes everything. Luna: A final question for the road: do you think consumers will adapt by switching to cheaper, non-imported alternatives, or will they just accept the higher prices? Lucas: That’s the million-dollar question. History shows they try both, but the debt levels suggest many are stretching themselves thin. We’ll see if resilience holds or breaks under the weight of these policy shifts.