Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why the Fed Is Stuck With Inflation That Wont Quit
Transcript
- Lucas: So the headline CPI numbers have been cooling for months now — May CPI came in at 334.0, up just a tick from April. But the Fed doesn't actually target CPI. They target core PCE, the personal consumption expenditures price index excluding food and energy. And that number, released for April, sits at 129.6 — still climbing. Luna: Right — so the headline looks better, but the Fed's preferred gauge is still sticky. What's driving that difference? Lucas: It's the composition. Core PCE puts more weight on services — things like rent, health insurance, financial services. And those categories have been remarkably stubborn. Core CPI, which gets more attention in the press, rose to 336.1 in May. That's up from 335.42 in April. So both are still trending upward, just at a slower pace. Luna: And the Fed's been very clear they want to see sustained progress before cutting rates. The effective Fed funds rate is at 3.63 percent right now. The market has been pricing in cuts for months, but the data keeps pushing them further out. Lucas: Exactly. Look at the 10-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade. As of last week, it's at 2.25 percent, down just slightly from 2.26. That's telling you bond traders don't see inflation collapsing. They see it settling a bit above the Fed's 2 percent target. Luna: So the market is basically saying, 'We don't believe the Fed is going to get all the way to 2 percent anytime soon.' And the Fed is saying, 'We're not cutting until we get there.' That's a standoff. Lucas: It is. And the stickiest component is shelter. Rent of primary residence and owners' equivalent rent — those make up about a third of the CPI basket. They've been decelerating, but very slowly. And there's a lag: market rents for new leases have been flat or falling in some cities, but that takes 12 to 18 months to feed into the official CPI measure. Luna: So the official numbers are still catching up to what renters are actually experiencing. That's frustrating for people who are renewing leases and seeing smaller increases, but the CPI still says rents are going up. Lucas: Right. And then there's insurance — both auto and health. Auto insurance premiums have been surging, up over 20 percent year-over-year in some states. That's partly because repair costs and replacement vehicle costs are still elevated from the supply chain disruptions a couple years ago. That feeds into core services inflation. Luna: And medical care services — that's another one. Hospital services, physician services — those are still running hot because labor costs in healthcare haven't come down. Nurses, technicians, they're in short supply. Lucas: Exactly. So when you strip out food and energy, the core services ex-housing — what the Fed calls 'supercore' — is still running around 3.5 to 4 percent annualized. That's basically double the target. And that's the piece the Fed is most focused on. Luna: It's the last mile problem. They've crushed goods inflation — supply chains normalized, used car prices fell, furniture prices are down. But services inflation is like trying to squeeze water out of a stone. Lucas: And the labor market is still tight. The latest headlines show Nevada is a hot spot for job seekers, but nationally, wage growth is still running around 4 percent. That's not super inflationary on its own, but it does keep pressure on service prices because labor is the biggest cost for most service businesses. Luna: So what does this mean for the average person listening? If the Fed holds rates higher for longer, that means mortgage rates stay high, car loan rates stay high, credit card rates stay high. The cost of borrowing isn't coming down soon. Lucas: That's the trade-off. The Fed is trying to squeeze inflation out of the economy by keeping money expensive. It's working on goods and some parts of housing, but services are proving very persistent. The risk is that they overtighten and cause a recession, or they cut too soon and inflation re-accelerates. Luna: And we've seen that movie before — the 1970s had a premature easing that led to double-digit inflation. The current Fed chair, Kevin Warsh, just had his first meeting last week. He's inheriting this delicate balancing act. Lucas: Right, and the Bank of England just held rates at 3.75 percent, citing similar concerns. So it's not just a US story — central banks globally are stuck in the same quagmire. Luna: Speaking of keeping things going, you know, this show is ad-free and listener-supported. We don't have corporate sponsors or annoying mid-roll ads. It's just us and the data. Lucas: Yeah, and it really does make a difference. A few dollars a month from listeners is what keeps the lights on here. If you've gotten something out of these episodes — maybe a better understanding of what's happening with your rent or your savings — you can toss a couple bucks in the tip jar at buy me a coffee dot com slash fexingo. Luna: Even a one-time contribution helps. It's a small gesture that adds up. And it lets us keep doing deep dives without having to chase ad revenue. Lucas: Alright, back to the inflation picture. So where do we go from here? The Fed's next move is data-dependent. The May PCE report comes out next week, and that's going to be the big one. If core PCE shows signs of accelerating, the market will push rate cut expectations even further into 2027. Luna: And if it softens? Then we might see the first cut in September or December. But given the stickiness in services, I wouldn't bet on it. Lucas: Neither would I. The breakeven rate is telling us the market expects inflation to average 2.25 percent over the next decade. That's not a disastrous outcome — it's actually pretty close to target. But it means the Fed's job isn't done. They have to keep rates restrictive until those service categories finally buckle. Luna: And that's the part that's hardest for households. High rates pinch everyone, but they hit lower-income families hardest because they have less savings and more variable-rate debt. Lucas: Exactly. So the macro picture is one of grinding persistence. Inflation isn't spiking, but it's not disappearing either. And that's the new normal — at least for the rest of this year. Luna: It's a steady, slow burn. And we'll keep watching the data each month to see when — or if — that last mile gets crossed. Lucas: Thanks for hanging with us. We'll be back next week with another deep dive.