Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Inflation Rate Is Lower Than the CPI Now
Transcript
- Lucas: So June CPI came in at 3.5 percent, year over year. That's down from May, and it's the lowest print we've seen in a couple of years. The market reaction was pretty muted — S&P up a little, bonds barely budged — because the number was basically in line with expectations. Luna: Right, the headline was lower, but a lot of people still feel like prices are climbing. But I want to talk about something that's actually flipped: for the first time in a while, your personal inflation rate might be lower than CPI. Lucas: Yes. That's the counterintuitive story here. For years, everyone's been saying 'my inflation is higher than the government's number.' And that was true for a lot of people — especially renters, especially people who don't own cars, especially people who buy a lot of services. Luna: And now the shoe is on the other foot for some groups. Let's unpack that. Lucas: So the CPI is an average. It measures the price change of a fixed basket of goods and services. But the Bureau of Labor Statistics does this thing called 'substitution' — they assume that if beef gets too expensive, you'll switch to chicken. And that lowers the measured inflation rate. Luna: Right, substitution bias. And when gas prices spike, the CPI assumes you drive less. That made the official number lower than what people actually experienced during the energy crisis. Lucas: Exactly. But now the dynamic is reversing. Gas prices have fallen significantly. June's wholesale price data, released yesterday, showed a surprise drop of 0.3 percent, largely because of a big decline in gasoline. So if you drive a lot, your personal fuel costs are dropping faster than the CPI captures. Luna: Because the CPI's basket still assumes some substitution — it doesn't fully reflect that you're actually paying less at the pump if you're a commuter. So your personal inflation rate might be lower than 3.5 percent. Lucas: Right. Let's make it concrete. Imagine a suburban commuter who drives 30 miles each way to work. Gas is down, maybe 15 percent from a year ago. Their grocery bill is up maybe 2 percent. Their rent is up 4 percent, but that's a smaller share of their spending than gas and food. Their personal inflation might be 2.5 percent. Luna: And compare that to a renter in a coastal city who doesn't own a car. They take public transit, which hasn't gotten cheaper. Their rent is up 6 or 7 percent still. Their personal inflation could be 5 percent or more. So the same CPI number covers wildly different realities. Lucas: That's always been true. But what's new is that the gap is widening in the other direction. For the first time since 2021, some people are actually benefiting from the way CPI is calculated — because substitution bias is now working in their favor. Luna: It used to be that the CPI understated inflation for almost everyone. Now it might be overstating it for drivers and certain homeowners. That's a big shift. Lucas: And it matters for policy too. The Fed targets the PCE price index, not CPI. PCE uses a different formula — it allows for more substitution — and it's been running a little hotter than CPI lately. Core PCE for May was up 0.3 percent month over month. Luna: So the Fed's preferred measure is still sticky. But if personal inflation rates are diverging, how do they set one interest rate that works for everyone? Lucas: They can't. Monetary policy is a blunt instrument. But understanding your own inflation rate is useful for your own financial planning. If you're a driver, you might have more room in your budget now. If you're a renter, you're still feeling the squeeze. Luna: And that brings up another interesting point: the wholesale price drop. If producers are paying less for inputs, that should eventually flow through to consumer prices. But it's not guaranteed. Lucas: Right. The June PPI — producer price index — fell 0.3 percent. That's the first decline in wholesale prices in a while. Energy was the big driver. But core PPI, excluding food and energy, was flat. So the disinflation is mostly in commodities, not in services or labor. Luna: That's consistent with what we've been seeing: goods inflation is cooling, services inflation is stubborn. Rent, insurance, healthcare — those are still rising at a clip above 4 percent. Lucas: So for someone whose budget is heavy on services — say, a retiree with high healthcare costs and a fixed rent — their personal inflation is probably still above 3.5 percent. But for someone who spends a lot on gasoline and groceries, it's likely lower. Luna: And that's the key takeaway: the headline number is an average, but your number depends on your spending pattern. And this month, for the first time in years, the average might actually be higher than some people's reality. Lucas: Let me give you a tool to figure out your own rate. You can go to the BLS website and find the CPI weight for each category. Multiply the weight by the price change for that category, sum it up, and that's your personal inflation rate. Luna: Or there are online calculators that do it for you. But the point is, if you're not seeing it in your wallet, you're not crazy. The CPI might just not match your life. Lucas: And if this conversation helped you make sense of your own budget — I mean, if it was worth a coffee to you — we do have a way to support the show. It's buy me a coffee dot com slash fexingo. That's it. No pressure, just if you found value. Luna: Yeah, we keep the show ad-free and independent, and listener support is what makes that possible. So if today's episode clicked for you, that link is there. Lucas: Alright, back to the numbers. One thing I want to flag: the next CPI release is August 12. If wholesale price declines continue, we could see headline CPI dip below 3 percent for the first time since early 2021. Luna: That would be a big milestone. But the Fed has said they want to see sustained progress, not just one or two prints. And with core PCE still above 2.5 percent, they're not ready to declare victory. Lucas: No, and the labor market is still tight. JOLTS data last week showed job openings ticking up. So the Fed's balancing act continues. But for individuals, the message is: know your own inflation rate. It might surprise you. Luna: And if you're a driver, maybe enjoy the lower gas prices while they last. Because geopolitical risks — Hormuz, for example — could send them back up. Lucas: Absolutely. That's the wildcard. For now, though, the data is giving us a more nuanced picture than just 'inflation is falling.' It's falling unevenly, and that unevenness is creating winners and losers. Luna: And knowing which camp you're in is the first step to making better financial decisions. So check your own basket, and we'll keep tracking the numbers. Lucas: Next episode, we're going to look at one specific category that's been bucking the trend: car insurance. It's up double digits again. Why is that happening when new car prices are actually falling? That's for next time.