Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Wholesale Prices Are Screaming About Sticky Inflation
Transcript
- Lucas: Look at the headline from Thursday: wholesale prices jumped six point three percent annually in September, the biggest gain since twenty twenty-two. That number is screaming at us because it usually precedes consumer inflation by a few months. Luna: Right, but everyone has been telling us inflation is dead for months now, so why is the producer level still overheating? Lucas: Because the pipeline isn't empty yet. We're seeing two distinct forces colliding here. First, there's the lag effect of earlier supply chain disruptions finally hitting warehouse shelves. Second, and more concerning, is that businesses are having to raise prices just to cover their own input costs, which means they aren't absorbing margins anymore. Luna: So the cost push is happening upstream before it ever reaches the checkout counter? Lucas: Exactly. And when you look at the broader picture, the core CPI is still sitting at three hundred thirty-eight point nine. It hasn't moved much from August, which suggests this isn't a temporary blip. It's structural. Luna: And we know the Fed is watching this closely, especially with the PCE price index edging up to one hundred thirty-one point six in August. Lucas: That is the Fed's preferred gauge, and it's stubbornly persistent. The problem is that the policy tools they have right now feel blunt. The federal funds effective rate is at three point seven five percent, but the daily rate is tracking slightly higher at three point eight eight percent. Luna: Does that spread matter if the underlying cost pressure is coming from wages and logistics rather than just borrowing costs? Lucas: It matters immensely because labor is half the equation. Job openings dropped to seven thousand seventy-nine thousand in August, which is down from over seven thousand three hundred. That cooling in demand should theoretically ease wage pressure, but the data tells a more nuanced story. Luna: How so? If jobs are fewer, shouldn't that suppress the ability of workers to demand higher pay? Lucas: Not necessarily when you look at average hourly earnings for the private sector. They ticked up to thirty-seven point eight dollars in September. Even with fewer openings, the remaining jobs are competitive, and businesses are paying a premium to retain staff. Luna: So we have sticky wages meeting rising wholesale costs, and the Fed is stuck in the middle trying to find the sweet spot. Lucas: Precisely. And this brings us to the disconnect between what the market expects and what the data shows. Everyone assumes the Fed will hold rates in October, but Kevin Warsh recently pointed out that surprises are possible if this inflation trend continues. Luna: A surprise hike would be chaotic given how fragile the bond market looks right now with yields fluctuating. Lucas: The ten-year yield is at five point one percent, and while it's down slightly from last week, it's still elevated compared to where we were a year ago. The market is pricing in a longer period of higher rates than most economists originally forecast. Luna: It feels like we're in a holding pattern where no one wants to move first because the data is too noisy. Lucas: Noisy is an understatement. We have conflicting signals everywhere. Unemployment rose slightly to four point two percent, which sounds like weakness, but nonfarm payrolls added two hundred and ninety thousand jobs in the previous month, putting the total at one hundred fifty-nine million. Luna: That employment growth is still robust, which makes cutting rates risky when inflation isn't fully tamed. Lucas: Right. If the Fed cuts now, they risk reigniting that wholesale price spiral. But if they hold, they risk choking off an economy that is showing signs of fatigue, like the uptick in initial jobless claims to one hundred ninety-nine thousand. Luna: It's a classic catch twenty-two. Cool the economy too much and you get a recession, keep them tight and you fuel inflation. Lucas: And that is why the budget deficit is also relevant here. The U.S. budget deficit swelled to almost two trillion dollars for fiscal twenty twenty-six, up twelve percent in a single year. Luna: Government spending doesn't help with the inflation fight either, does it? Lucas: It complicates it significantly. You have massive fiscal stimulus running alongside tight monetary policy. It's like pressing the brake and the gas at the same time. The Treasury dismissed some IMF warnings about this messy forecasting, but the math doesn't lie. Luna: So when we look at the breakeven inflation rate dropping to two point three two percent, are we being lulled into a false sense of security? Lucas: I think we are. The bond market is pricing in lower long-term inflation expectations, but the real-time data from producers suggests otherwise. There is a divergence between financial markets and the physical economy. Luna: That divergence is dangerous because eventually, the physical economy wins. Goods have to be priced somewhere. Lucas: Agreed. And that leads me to a quick thought on how we fund this kind of deep dive into the numbers without relying on ads that might skew our perspective. Luna: Yeah, I appreciate that approach. It keeps the conversation focused on the actual economics rather than sponsor deliverables. Lucas: If walking through the economy with us has made something click, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: It helps us stay independent and dig into the details that big networks often skip over. Lucas: Back to the data then. The key question for Q four is whether those wholesale price gains will translate directly into retail markups or if consumers will start pushing back against higher prices. Luna: I suspect the latter. People are feeling the pinch with unemployment creeping up and wages barely keeping pace with the cost of living. Lucas: That resistance is crucial. If demand elasticity kicks in, businesses might have to absorb some of those costs rather than passing them on, which would break the inflation cycle naturally. Luna: Or it could lead to margin compression across entire sectors, forcing layoffs that we haven't seen yet. Lucas: That is the dark scenario. But let's look at the positive side. Real GDP growth was two point two percent annualized in the second quarter, down from two point five percent. Luna: Soft landing is still on the table if the growth slows just enough to curb inflation without crashing employment. Lucas: It's a very thin line to walk. The VIX is hovering, equities are mixed, and the bond market is sending mixed signals. We need to see next month's CPI and PPI data to know if this was a one-off spike or the new normal. Luna: Until then, we're just watching the tape and waiting for the Fed to make its next move. Lucas: Exactly. And for those listening, keep an eye on the service sector inflation specifically, as goods inflation tends to be more volatile but services tend to stick around longer. Luna: Good advice. It's easy to get distracted by the headline numbers, but the composition of that inflation tells the real story. Lucas: We'll be tracking it closely. Thanks for tuning in to The Macro Memo.