Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Double Scar How Past and Present Inflation Hits Your Wallet
Transcript
- Lucas: So there's this term that's been floating around in Fed speeches and economic research lately — 'double scar.' And it's not just academic jargon. It captures something real about what households are experiencing right now. Luna: Double scar — meaning the first scar from the inflation spike in 2021-2022, and then a second one from the current geopolitical shocks? Lucas: Exactly. The idea is that the memory of high inflation is still fresh, and now we have a new wave of price pressures — particularly from energy — tied to the Iran conflict. Each shock alone might be manageable, but together they're creating a lingering trauma in how people spend and save. Luna: And the data backs it up. We just got the April CPI reading — the all urban consumers index came in at 332.4, up from 330.29 in March. That's still elevated, but it's the composition that's worrying. Lucas: Right. Core CPI ex food and energy was 335.4, up from 334.17. So the core is sticky. But what's really hitting households is energy. CNBC ran a piece Friday estimating the average U.S. household is paying about $450 more on gas and energy because of the Iran situation. Luna: That's not trivial. For a family already stretched by higher rent and insurance premiums — which we've talked about before — that extra $450 is a real pinch. Lucas: And the Fed's preferred gauge, the PCE price index, hit an annual rate of 3.3 percent in April. That was as expected, but it's still above the Fed's 2 percent target. So you have this disconnect: headline inflation is cooling slowly, but the lived experience feels worse because of these concentrated shocks. Luna: Fed's Goolsbee said energy inflation has been more persistent than expected. And Kashkari said the inflation fight takes priority because the labor market is in decent shape. So they're not pivoting anytime soon. Lucas: That's the double scar in policy terms. The first scar made the Fed overcorrect later than it should have. The second scar is making them hesitant to ease even as growth concerns mount. The ten-year breakeven inflation rate — the market's expectation — actually dipped to 2.38 percent, down from 2.39. So bond traders are pricing in slightly lower long-term inflation, but the near-term pain is real. Luna: Let's talk about how this double scar shows up in different parts of the economy. One area is housing. Rent inflation has been decelerating, but not as fast as hoped. And homeowners are facing higher insurance premiums because of climate risks and inflation in building materials. Lucas: Yeah, we've covered insurance as a new inflation signal before. But the double scar adds a layer: households that were already struggling with higher rents in 2022 are now facing another round of cost increases from energy and insurance. It's cumulative. Luna: And it's not just the poor. Middle-income families are feeling it too. They might have some savings left from the pandemic, but those are eroding faster than expected. Lucas: There's a psychological effect as well. When people expect inflation to stay high, they change their behavior — they buy in bulk, they demand higher wages, they delay large purchases. That can become self-fulfilling. Luna: So the Fed is fighting not just current inflation, but also the expectations channel. That's why they keep talking about being 'data dependent' but also 'vigilant.' Lucas: Exactly. And the latest data shows core CPI is still running at about 3.3 percent annualized. That's not terrible, but it's not close to 2 percent either. The Fed funds rate is at 3.64 percent effective — flat for months. So real rates are barely positive. Luna: Which means the Fed might need to hold rates higher for longer. But that risks slowing the economy too much. It's a delicate balance. Lucas: One interesting angle is how different income groups experience the double scar. Lower-income households spend a larger share of their budget on energy and rent, so they feel the second scar more acutely. Higher-income households might have more savings and investments that benefit from inflation — like gold, which is at $4,506 an ounce. Luna: Gold surging despite cooling inflation — we did an episode on that. But it ties in: investors are hedging against uncertainty, while consumers are just trying to pay the bills. Lucas: And the uncertainty is real. The Iran conflict shows no signs of de-escalation. Oil prices remain elevated. That feeds into every part of the supply chain — shipping, manufacturing, retail. Luna: I want to bring in a specific example. Let's look at how the double scar is affecting small businesses. A restaurant owner I know is dealing with higher food costs, higher energy bills, and higher labor costs because employees are demanding raises to keep up with inflation. Lucas: That's the classic wage-price spiral risk. If businesses pass on those costs, it feeds back into CPI. If they absorb them, margins get crushed. Either way, the double scar deepens. Luna: And the Fed's tools are blunt. They can't target energy prices or supply chains. They can only cool demand by making borrowing more expensive. Lucas: So the question becomes: how long does this double scar last? The breakeven rate suggests markets think inflation will moderate over five to ten years. But the next twelve months could still be rough. Luna: And what about the consumer confidence data? That's been volatile. People say they're pessimistic, but they're still spending. That's the paradox. Lucas: Right. Spending is holding up because of the labor market — unemployment is low, wages are rising. But the double scar means people are saving less and carrying more debt. That's not sustainable. Luna: So the Fed is watching consumer debt levels closely. Delinquencies on credit cards and auto loans are ticking up. Lucas: And that brings us back to the idea of 'scarring.' Once households take on more debt to cope with inflation, it takes years to unwind. That's the lasting damage. Luna: It feels like we're in a new phase of this inflation cycle — not the peak, but the long tail. And the double scar concept helps explain why it's so persistent. Lucas: Yeah. And honestly, if walking through the economy with us has made something click, there's a small way to support the show. It's ad-free, listener-supported. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: It really helps keep us independent. And we appreciate every bit of support. Lucas: So back to the double scar — one area I think is underappreciated is how it affects housing differently for renters versus owners. Renters have seen big increases in the past two years, but those are starting to slow. Homeowners, on the other hand, are facing higher insurance and property taxes. Luna: And if you're a homeowner with a fixed-rate mortgage, your housing cost is stable, but everything else is going up. For renters, both rent and other costs are rising. So the double scar is asymmetric. Lucas: Exactly. And that's why the Fed's inflation measures might not capture the full picture. The official CPI for shelter is based on rents, not homeowner costs. So it might understate the burden on owners. Luna: Good point. The PCE index tries to adjust for that, but it's not perfect. So policymakers are flying partly blind. Lucas: Bottom line: the double scar is a useful framework for understanding why inflation feels worse than the numbers suggest, and why the Fed is staying hawkish. It's not just about the current shock, but the accumulated trauma. Luna: And it's not going away quickly. Geopolitical risks remain, supply chains are fragile, and expectations are sticky. So we're in for a longer adjustment period. Lucas: Which brings us back to the question we started with: how long will this last? The market says two to three years for inflation to normalize. But the scars could last a decade. Luna: Let's check back in a few months. For now, thanks for joining us on Inflation Explained. Lucas: We'll see you next time.