Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Service Prices Are Keeping Inflation Sticky
Transcript
- Lucas: Luna, I want to start with a single number: the core CPI for April came in at 335.4, up from 334.17 the month before. That is not the direction anyone wanted to see. Luna: Right, and the headline CPI hit 332.4. The market barely flinched because a lot of that was expected, but the fact that core is still climbing quarter over quarter feels like the story that isn't getting enough airtime. Lucas: Exactly. And here's the thing — when people hear 'CPI is sticky,' they usually picture gas prices or grocery bills. But the real pressure is coming from services. Rent, car insurance, medical care, haircuts, repairs — things you can't easily substitute or defer. Luna: Goods have actually been deflating in some categories. Electronics, furniture, even used cars are flat to down. But services are running hot, and they have a much bigger weight in the index. Lucas: Shelter alone accounts for about a third of the CPI basket. And while the official rent measure is still rising at about 4.5 percent annually, the real-time data from places like Apartment List shows asking rents have been flat for three months. The issue is that CPI lags the real world by six to twelve months. Luna: So the official number might finally cool later this year, but right now we're still digesting the 2025 rent increases. Lucas: Precisely. And then you layer on car insurance, which is up something like 15 percent year over year. Part of that is that cars are more expensive to repair — advanced sensors, longer parts supply chains — but also insurers are catching up on loss ratios from the pandemic era. Luna: I saw a stat that the average annual premium passed $2,500 this year. That's not discretionary spending — you need insurance to drive. Lucas: And medical care services continue to trend up about 3 percent annually. That's not pandemic catch-up; that's structural. An aging population, consolidation among hospital systems, and higher labor costs for nurses and technicians. None of that is going to reverse. Luna: So if goods deflation is real and services inflation is persistent, what does that mean for the Fed? They've held the fed funds rate at around 3.6 percent since December. Lucas: The ten-year breakeven inflation rate — that's the market's expectation for average CPI over the next decade — is sitting at 2.40 percent, basically unchanged this week. That tells me bond traders are not betting on a rapid disinflation. They see services as structurally sticky. Luna: And if the breakeven is above the Fed's two percent target, they probably can't cut without risking a reacceleration. Lucas: Right. The Fed's own latest projections showed one or two cuts later this year, but that was before the April CPI print. Chair Warsh has been pretty clear that they need to see sustained improvement in services inflation specifically before they move. Luna: Kevin Warsh, yeah. He's focused on the price of domestic services as the key metric. If wage growth in that sector doesn't moderate, services inflation won't either. Lucas: That's the core insight. Services are labor-intensive. When wages go up in hospitality, healthcare, and personal services, those costs get passed through. And with the unemployment rate still below four percent, workers have bargaining power. Luna: So the average listener — someone with a 401k and a mortgage — what should they take away from this? Lucas: Two things. First, don't assume inflation is vanquished just because gas is cheaper and your TV was on sale. The part of your budget that's hardest to control — housing, insurance, healthcare — is still inflating. Second, if you're making investment decisions, the fact that services inflation is sticky means interest rates probably stay higher for longer. That changes the calculus for growth stocks versus value, for bonds versus cash. Luna: Which is exactly what we've seen in the last few weeks. The Russell 2000 is up 3.4 percent in five days — small caps benefit from a strong economy and relatively high rates because they're more domestic, less rate-sensitive than tech. Lucas: And the S&P 500 is up one percent over the same period, the Dow up 1.8 percent. The market isn't panicking about inflation — it's rotating into sectors that can perform in a no-cut environment. Luna: So the key variable to watch isn't the next headline CPI number. It's the monthly change in services ex-shelter. If that starts trending below 0.3 percent month over month, the Fed has room. If it stays at 0.4 or higher, we're stuck. Lucas: Exactly. And one specific number I'm watching is the Atlanta Fed's wage tracker for service occupations. It's still running above 4.5 percent. Until that number comes down, services inflation will have a floor under it. Luna: Speaking of things that help make sense of this environment — if our money conversations have added a little clarity to your financial decisions, listener support is what keeps this show ad-free and independent. We don't have sponsors, we don't sell products, we just try to connect the dots each week. Lucas: Yeah, it's a small operation — just the two of us and a producer. If you find value in that, you can help at buy me a coffee dot com slash fexingo. No pressure, genuinely, but it makes a real difference. Luna: Back to services — one more thing. Medical care inflation might actually accelerate before it slows, because of the new Alzheimer's drugs that are hitting the market. They're expensive, they're administered intravenously, and they're being covered by Medicare. That's a multi billion dollar cost that shows up in CPI. Lucas: Great point. And that's a reminder that some inflation is actually good — it means we're developing treatments, building things, employing people. The problem is when it outpaces wage growth for too long, which is where we are now. Luna: So the bottom line for May 2026: services are the story, goods are not, and the Fed is watching the same numbers we are. If you're managing your own money, the right hedge isn't gold or crypto — it's understanding which costs you can control and which you can't. Lucas: And that understanding is exactly what we'll keep digging into. Next episode we'll talk about one specific service sector that might surprise to the downside. See you then.