Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Real Cost of Stagflation in Your Grocery Cart
Transcript
- Lucas: Let’s start with the number that feels most visceral to listeners right now: the July Consumer Price Index came in at three hundred thirty-two point eight. That looks like a modest increase from June, but when you strip out food and energy to get to Core CPI, it hit three hundred thirty-six point eight. That’s the real anchor holding down household budgets. Luna: Right, because the headline number often masks the structural rot in the middle. I drove past three different grocers yesterday, and the price tags on staples haven’t moved back down—they’ve just stopped climbing faster. Lucas: Exactly. And here is the stagflation trap: nominal GDP growth has slowed to one point five percent annualized for the second quarter, yet the price elasticity of basic necessities remains incredibly low. Businesses aren’t cutting prices because their own input costs—shipping, labor, raw materials—are sticky. They are absorbing the margin squeeze or passing it on, rarely both. Luna: So we’re seeing a classic cost-push scenario without the demand-pull relief. The Fed is watching this closely, especially with the ten-year breakeven inflation holding flat at two point three five percent, which suggests markets think this is temporary. But is it? Lucas: It’s not temporary if wage growth can’t keep up. Average hourly earnings for private workers rose to thirty-seven dollars and eighty cents in August, but that’s barely ahead of the pace needed to offset the cumulative inflation since twenty-twenty. The unemployment rate is sitting at four point one percent, which sounds healthy until you realize job openings are still high at seven thousand two hundred seventy-one thousand. Employers are bidding for talent, but they aren’t expanding output fast enough to lower consumer prices. Luna: That disconnect between hiring and production efficiency is key. If companies are paying more but not getting more output, the per-unit cost goes up. That’s exactly where we see the pressure building in sectors like food processing. Lucas: Take the meatpacking and dairy sectors as an example. Labor shortages in rural processing plants mean fewer shifts run, which reduces volume. When volume drops, fixed costs per unit rise. Those plants aren’t running at full capacity because they can’t find enough reliable workers willing to take those shifts at current wage rates. So, milk and meat stay expensive not because cows are scarce, but because the logistics of getting them to you are broken. Luna: It’s a localized bottleneck creating a national price floor. And since consumers can’t easily substitute away from protein or dairy, demand stays inelastic. You just pay the higher price. Lucas: Precisely. And this brings us to the broader implication for the FOMC. With the S&P five hundred up six-tenths of a percent over the last five days, equity markets seem optimistic. But the underlying reality is that real GDP growth is sluggish at one point five percent. The central bank is caught between supporting a fragile recovery and taming entrenched core inflation. Luna: It feels like they are walking a tightrope. One rate hike could crush the housing market, but holding steady might let inflation expectations embed deeper into wage negotiations. Have you seen the latest data on initial jobless claims? Lucas: Yes, they ticked up to two hundred six thousand in late August. It’s a small move, but in a stagflationary environment, any sign of labor market cooling can trigger a deflationary spiral if not managed carefully. However, we aren’t seeing mass layoffs. We’re seeing slower hiring. That’s the difference between a recession and stagflation. Luna: A slow bleed rather than a sudden shock. Which means the pain is distributed unevenly across income brackets. Lower-income households spend a much higher percentage of their income on food and energy. For them, a two percent price increase isn’t a statistical anomaly; it’s a choice between heating and eating. Lucas: And that’s why the political pressure is mounting. We’re seeing headlines about trade rifts, like Canada’s retaliatory tariffs, which add another layer of cost to cross-border supply chains. Every tariff, every labor dispute, every weather event adds friction. Friction equals cost. Cost equals price. And in a slow-growth economy, there’s no surplus profit to absorb that cost. Luna: So the solution isn’t just monetary policy. It’s structural. We need productivity gains to offset the wage and input cost increases. Otherwise, we’re stuck in this loop forever. Lucas: Productivity is the magic word, isn’t it? But implementing AI and automation in small and mid-sized businesses takes time and capital. Right now, many firms are cash-flow constrained. They can’t invest in efficiency tools because their margins are already thin. It’s a catch- twenty-two. Luna: Unless the government steps in with targeted subsidies or tax incentives for greenfield investments in logistics and processing infrastructure. But given the deficit levels we discussed last week, fiscal space is limited. Lucas: That’s right. The forty trillion dollar debt mountain limits what Washington can do. So we’re left with the market to self-correct, but markets are slow. And meanwhile, the average American is feeling the pinch every single time they swipe their card at the checkout aisle. Luna: It’s frustrating because the data says we’re doing okay on paper. Unemployment is low. Stocks are near highs. But the lived experience is one of shrinking purchasing power. Lucas: That gap between aggregate data and individual reality is where the next crisis might emerge. Not a financial crash, but a social contract fracture. People feel cheated by the system when their effort doesn’t translate into prosperity. Luna: And that sentiment drives policy shifts. Whether it’s stricter antitrust enforcement or calls for price controls, the public appetite for radical intervention grows when baseline stability erodes. Lucas: We’ll see how the September FOMC meeting plays out. With inflation data due next month, the pressure will be intense. But for now, the strategy for listeners is clear: diversify assets, hedge against volatility, and recognize that cash is losing its potency. Luna: Smart advice. And maybe a reminder to check your local supply chains too. Sometimes the best hedge is knowing where your food comes from. Lucas: Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It helps us keep digging into these complex topics without ads cluttering the conversation. Luna: Yeah, and it keeps the lights on for this show. Thanks for listening, it really means a lot. Lucas: Back to the data. Let’s look at the PCE price index, which came in at one hundred thirty-one point seven for July. This is the Fed’s preferred gauge, and it tracks core PCE at one hundred thirty point seven. Luna: The divergence between CPI and PCE is interesting here. PCE tends to be softer because it accounts for substitution bias—consumers switching to cheaper alternatives. But as we saw, substitution is hard for essentials. Lucas: Correct. And the year-over-year change in core PCE is hovering around two point nine percent. That’s above the Fed’s two percent target. It’s not alarming, but it’s persistent. It signals that disinflation is grinding to a halt rather than accelerating. Luna: Grinding to a halt is worse than falling slowly. At least falling gives hope. Stagnation breeds pessimism. Lucas: Pessimism affects investment decisions. When businesses expect prices to stay elevated, they delay expansion. That delays job creation. That keeps wages flat. It’s a vicious cycle. Luna: So breaking that cycle requires an external shock. Either a technological breakthrough that lowers costs or a significant drop in energy prices. Both seem unlikely in the short term. Lucas: Energy prices are volatile. We saw gold jump to four thousand four hundred eight dollars, signaling fear. Silver is up too. Investors are hedging against currency debasement and supply shocks. Luna: Which reinforces the idea that fiat currencies are under pressure. If trust in the dollar wavers, inflation expectations could spike rapidly. Lucas: But we’re not there yet. The dollar remains strong relative to many peers. It’s the internal dynamics—the interaction between labor, goods, and services—that are the problem. Luna: Internal dynamics are harder to fix than exchange rates. They require structural reform. Good luck with that in a polarized political climate. Lucas: Indeed. So we watch and wait. The numbers will tell us if we’re turning a corner or digging deeper. Until then, stay sharp. Luna: Always. Thanks for joining us on this deep dive into the economics of everyday life. Lucas: Our pleasure. See you next time on Stagflation Conversations.