Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Electric Bill Is Outrunning CPI
Transcript
- Lucas: Luna, I've been looking at the May CPI release from a few weeks ago, and there's a number in there that I think gets overlooked because everyone's so focused on the headline and core rates. Luna: Which number are you talking about? Lucas: The electricity index. It rose 0.6 percent month over month in May, and it's up about 4.2 percent year over year. That's meaningfully above the overall CPI inflation rate, which is running around three point four percent on core. Luna: And that's not just a May blip. I remember seeing that electricity was already up pretty sharply earlier this year. Lucas: Right. The twelve-month change has been above three percent for most of the past year and a half. What's interesting is that this is one of those categories that households feel every single month. It's not like buying a new car or a television. It's a recurring bill that's hard to avoid. Luna: So what's driving it? Is it fuel costs, grid maintenance, something else? Lucas: It's really a combination. On the generation side, natural gas prices have been volatile. A lot of the country's electricity comes from gas-fired plants. When gas prices go up, that flows through to your bill pretty quickly. But there's also a structural piece: utilities are spending heavily on grid modernization and hardening against extreme weather. Luna: And those capital costs get passed through in rate cases that regulators approve. That's not a market fluctuation, that's a slow, steady increase. Lucas: Exactly. And then there's a newer factor that's really started to show up in the data: data center demand. The buildout of AI computing infrastructure is pulling a massive amount of electricity. Some utilities in regions with big data center clusters — think Northern Virginia, parts of the Midwest — are seeing load growth they haven't seen in decades. Luna: Right, and that demand pushes up wholesale power prices, which eventually shows up in the CPI even for residential customers. Lucas: The Bureau of Labor Statistics actually captures residential electricity prices in the CPI, not commercial or industrial. So what you're seeing in the index is what households are paying. And that's been climbing. Luna: So is this a temporary thing tied to a cold winter or a hot summer? Or is this the new normal? Lucas: I think it's more structural than seasonal at this point. The grid investment piece isn't going away. We need to replace aging infrastructure and add resilience. And data center demand is projected to keep growing. You can see this reflected in the core services inflation number that the Fed is watching so closely. Luna: Because electricity costs are embedded in the price of almost everything. When your local bakery pays more to run its ovens, that eventually shows up in the price of a loaf of bread. Lucas: It's a really good example of why core inflation has been so sticky. The Fed has cut rates to three point six three percent on the effective federal funds rate, but services inflation that includes things like rent, medical care, and utilities is proving hard to break. Luna: And the Fed's preferred gauge, the core PCE, came in at 130.1 in May, up from 129.67. That's still elevated. So this isn't just a CPI story. Lucas: If walking through the economy with us has made something click, I'll just mention that listener support is what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to help us keep digging into these details without any sponsored interruptions. And we really appreciate it. Lucas: So, back to electricity. One of the challenges for the Fed is that they don't directly control energy prices. But because electricity is such a big input cost across the economy, persistent increases here could make it harder to get core inflation down to their two percent target. Luna: And we saw the ten-year breakeven inflation rate ticked down to 2.18 percent as of yesterday. That suggests the bond market thinks inflation will moderate. But if electricity keeps rising, that forecast could be optimistic. Lucas: The breakeven is a market-based expectation, and it's been hovering around that level for a while. But the actual realized inflation in categories like electricity is outpacing it. Luna: So what should a listener do with this information? I mean, you can't exactly switch electricity providers in most places. Lucas: Right, it's not like shopping for a better deal on streaming services. But understanding that this is a structural shift, not a temporary spike, might help people plan. If you know your utility bills are likely to keep rising at three to four percent a year, you can factor that into your household budget. Luna: And maybe pay attention to your state's regulatory environment. Some states are more aggressive about approving rate increases than others. Lucas: That's a great point. And it's also worth noting that the CPI for electricity can vary a lot by region. The national average is four point two percent year over year, but if you're in New England or California, you might be seeing much bigger increases. Luna: And in states with a lot of renewable energy, you might see more stable prices because you're not as exposed to natural gas volatility. Lucas: Exactly. So the headline inflation number might feel disconnected from your personal experience, and that's because it is. The CPI is an average. Your electricity bill is specific to your region, your utility, and your usage. Luna: So when we talk about inflation cooling, it's important to remember that not every category cools at the same time. Lucas: And electricity is one of those categories that is proving very stubborn. It's a good reminder that the path back to two percent inflation is going to be uneven. Luna: Thanks for walking us through that, Lucas. I know my next bill is going to look a little different knowing what's behind it.