Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Your Grocery Bill Is Sticky Even as Inflation Eases
Transcript
- Lucas: So the headline CPI came in at 3.3 percent for June, and that's actually down from earlier this year. Core inflation is cooling too. But I was at the supermarket yesterday, and a jar of pasta sauce that I swear cost three-fifty last year is now four-ninety-nine. And I'm not alone — everyone's got that story. So why does the grocery bill feel so sticky when the data says inflation is easing? Luna: Right, the data and the cart feel disconnected. What's going on there? Lucas: Well, the first thing is that the CPI for food at home is actually still running hotter than the overall index. The overall CPI dipped to 3.3 percent in June, but food-at-home inflation is closer to 4.5 percent. And that gap is partly because food prices are stickier than, say, gasoline or used cars. When the cost of inputs goes up — like wheat, or energy for processing — it takes months for that to show up at the checkout. And when input costs come down, prices don't fall nearly as fast. Luna: So we're seeing a lag effect. But it's been over a year since the big commodity spike. At some point, shouldn't that catch up? Lucas: You'd think so, but there's a reason it doesn't. Let's look at the producer price index for processed foods. That's been coming down for a few quarters now, but the consumer price for the same products hasn't budged. Part of that is what economists call 'menu costs' — literally the cost of changing prices. Retailers and manufacturers would rather eat a slightly thinner margin than reprint labels and retrain staff every quarter. Luna: So they just keep prices high to avoid the hassle? Lucas: That's part of it, but there's something sneakier. In the 1970s, when stagflation hit, companies figured out they could shrink the package instead of raising the price. A box of cereal goes from sixteen ounces to fourteen, but the price stays the same. That way, the CPI might look flat, but the consumer is paying more per ounce. And that's still happening today. I saw a bag of coffee that was twelve ounces last year, now it's eleven. Luna: So the price is the same but you're getting less. That's shrinkflation, and it's frustrating because it feels deceptive. Lucas: Exactly. And it's not just coffee. It's crackers, toilet paper, even laundry detergent. The CPI tries to adjust for that by quality-adjusting, but the reality is that consumers feel it in their carts. And that's why the perception of inflation is often higher than the official number. In fact, there's a well-documented gap right now between what people say they're experiencing and what the CPI shows. Luna: So the official numbers say inflation is easing, but the grocery store says otherwise. That's got to have political and psychological consequences. Lucas: It does. And that's why the Fed is in such a bind. The real GDP growth in the second quarter came in at just 1.5 percent — that's down from 2.1 percent the quarter before. So the economy is slowing. But the Fed's new chair, Kevin Warsh, has been talking tough on inflation. The core PCE index, which is the Fed's preferred gauge, is still running above their 2 percent target. So they're facing a classic stagflation dilemma: do they hike rates to fight inflation and risk a recession, or do they hold steady and risk letting inflation expectations get entrenched? Luna: And the Fed is divided on that. I saw that headline about a divided Fed. That can't be good for markets. Lucas: Right. The market is pricing in a pause at the next meeting, but there's a faction that wants to hike again because they remember the 1970s. Paul Volcker had to push rates to double digits to break the back of inflation, and that caused a nasty recession. Warsh doesn't want to repeat that, but he also doesn't want to be the guy who let inflation re-accelerate. Luna: So what does that mean for the grocery aisle? Are we going to see prices actually come down, or are we just stuck with high prices? Lucas: Realistically, we're not going to see prices fall back to 2020 levels. That's not how inflation works. Once prices go up, they rarely come down — except for maybe a few categories like eggs or gasoline. What we're hoping for is that inflation slows to a point where wage growth catches up. And actually, average hourly earnings are up 3.7 percent year-over-year, which is above the current inflation rate. So real wages are starting to grow again — just not enough to make up for the last few years. Luna: So we're treading water, but at least we're not sinking. Lucas: That's a fair way to put it. But there's another layer to this stickiness that's worth unpacking. It's not just menu costs and shrinkflation. It's also the fact that food manufacturers have a lot of pricing power now. They've consolidated over the past decade, so there's less competition. When a few big companies control most of the branded shelves, they can hold prices higher for longer without losing customers. Luna: So is that a structural thing? Like, even when the economy normalizes, we're just stuck with higher prices because the market isn't competitive? Lucas: Partly. And that's a tough one because antitrust enforcement hasn't really focused on the grocery sector. But there are some signs that the stickiness is starting to break. The producer price index for processed foods has actually been falling for a few months. If that continues, we might see some promotional activity — buy-one-get-one deals, maybe a few price cuts on private label brands. But it's going to be slow. Luna: Slow and frustrating. So what should a regular person do? Is there a strategy to save money at the store right now? Lucas: The biggest one is to switch to private labels. Store brands are often made in the same factories as the name brands, but they're typically 20 to 30 percent cheaper. And as inflation has persisted, the quality gap has narrowed even further. I've done blind taste tests at home — some of the store brand stuff is actually better. Luna: I've noticed that too. The store brand cereal is basically the same as the name brand, but a third less. Lucas: Exactly. And that's also a signal to retailers. When consumers trade down to private labels, it pushes the big brands to be more competitive. So if you want to vote with your wallet, that's one way. But also, pay attention to unit prices. The shelf tag tells you the price per ounce or per hundred grams. And that's where you'll catch the shrinkflation — the unit price goes up even if the package price stays the same. Luna: That's a practical takeaway. But let's step back for a second. We keep hearing about the 1970s echoes. Is this actually like the 1970s, or is it just a convenient historical parallel? Lucas: It's a real echo, but with a big difference. In the 1970s, you had two oil shocks that drove energy prices through the roof, and the Fed was behind the curve. Today, oil prices are rising again — that's part of why Singapore just tightened policy — but the bigger driver of this inflation was the pandemic supply chain mess and fiscal stimulus. The difference is that central banks are much more hawkish now. They learned the Volcker lesson. So they're not going to let inflation run hot for a decade. The question is how much pain they're willing to inflict to bring it down. Luna: And that's where the stagflation conversation gets really interesting. It's not just about prices, it's about the tradeoff. Lucas: Right. And that tradeoff is showing up in the data. Real GDP is growing at 1.5 percent, which is barely above stall speed. But the unemployment rate is still low at 4.2 percent. So we have this weird mix of slow growth and a tight labor market. And that's not a typical stagflation setup — in the 1970s, unemployment was high too. Now, we've got a low unemployment rate but weak growth, which is a bit different. Luna: So if we're not technically in a recession, but it feels like one, what do we call it? Lucas: Some people are calling it a 'growth recession' — enough growth to avoid a contraction, but not enough to feel like a recovery. And that's the tricky part for policymakers. If they tighten too much, they could tip it into an actual recession. If they ease too soon, inflation could re-accelerate. And that's why the Fed is divided — there's no clear path that avoids pain. Luna: So we're in a real bind. And for the average person, that means the grocery bill stays high, and maybe the job market gets a little softer. Lucas: Yeah, and that's the realistic scenario. But it's not all doom and gloom. If you're listening to this and feeling like you want to be smarter about your money, one of the best things you can do is track your own personal inflation rate. The CPI is an average — your actual experience might be higher or lower. And if you know you're paying more for the things you buy, you can adjust. Luna: That's actually a great point. And if you've found this conversation useful, if it's helped you think about the economy in a clearer way, the way we keep this show ad-free is through listener support. If you want to help us keep doing this, you can buy me a coffee at buy me a coffee dot com slash fexingo. It's a simple way to say thanks, and it means a lot. Lucas: Yeah, and it's genuinely what keeps these episodes coming. We don't have sponsors, so it's really just you. But back to the sticky prices — there's one more thing I want to mention. The breakeven inflation rate, which is what the bond market expects over the next ten years, is sitting around 2.28 percent. That's up slightly from last week. So the market is expecting inflation to settle around the Fed's target, not spiral out of control. That's a bit reassuring. Luna: So the bond market thinks we're okay, even if the grocery store doesn't? Lucas: Exactly. The bond market is the closest thing we have to a rational crystal ball. And right now, it's saying that this sticky feeling in your cart won't last forever. But it might take another year or two for it to fully work through. And in the meantime, the best defense is to be a smart shopper and a smart voter — because the policies we choose today will shape how fast this unwinds. Luna: Well, that's a good place to leave it. Thanks for walking us through the data, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. Next time, we'll dig into another corner of the economy that's being reshaped by these forces. Until then, keep your eyes on the unit prices.