Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Hidden Cost of Sticky Services Inflation
Transcript
- Lucas: If you look at the headline inflation number for September, it looks like things are finally calming down. The CPI is at 336.3, which is only a tiny tick up from the previous month. On paper, the worst of the price shock seems to be over. Luna: But does it feel calm to you? I walked through my local grocery store yesterday and the shelves were either empty or more expensive than last week. It’s not just food though, it’s everything else. Lucas: That disconnect is exactly what we need to talk about today. The headline CPI includes volatile items like energy and fresh food, but those are actually the parts that have been relatively stable recently. The real pain point is buried in the Core CPI, which excludes those volatile categories and sits at 338.9. Luna: So if the core number is higher and sticking around, where is that pressure coming from? Is it just wages pushing prices up again? Lucas: Not exactly wages this time. It’s what economists call sticky services. Think about your rent, your insurance premiums, or your doctor’s visit. These prices don’t drop easily. They go up when costs rise, and then they stay there for years because businesses have locked in contracts or simply refuse to lower rates. Luna: Right, and with the Fed Funds rate still hovering near 3.75 percent, borrowing costs remain high enough that these service providers aren’t under pressure to compete on price. Lucas: Exactly. And here is the kicker that most people miss. We just saw wholesale prices jump 6.3 percent annually in September. That is the biggest gain since 2022. When wholesale costs for manufacturers and distributors start rising that sharply, those costs eventually get passed down to consumers in the form of higher service fees and retail markups. Luna: That is terrifying. If wholesale prices are screaming while consumer prices look quiet, who is eating the difference right now? Lucas: For now, some retailers might be absorbing small hits to keep customers, but they can’t do that forever. Look at the broader market context. The S&P 500 has pulled back nearly two percent over the last five days, hitting 7,659. Investors are starting to worry that this wholesale spike will reignite service inflation. Luna: So the market is reacting faster than the official monthly reports. What does this mean for someone trying to budget their household expenses this quarter? Lucas: It means you should stop looking at the headline inflation number and start looking at your own personal basket of services. Shelter, healthcare, and transportation are the big three. Those categories make up a huge chunk of the Core CPI, and they are currently moving independently of the goods economy. Luna: I noticed my car insurance went up significantly last month, even though gas prices have been flat. Is that part of this same sticky dynamic? Lucas: Absolutely. Insurance is a classic service industry. They pay out claims based on recent accident costs, repair labor, and parts prices. Since wholesale parts prices jumped 6.3 percent, insurers are recalibrating their risk models upward. You are seeing the lagged effect of supply chain costs hitting service contracts. Luna: It feels like the economy is splitting into two tracks. One track for goods, which is getting cheaper, and one track for services, which is getting more expensive. Lucas: You nailed it. Goods deflation is real. You can buy electronics and appliances for less than a year ago. But services require human labor and physical space, both of which are subject to persistent cost pressures. The Bureau of Labor Statistics tries to capture this, but the data comes out slowly. Luna: Does the Federal Reserve care about this split? Are they targeting the Core CPI specifically because they know goods prices are misleading? Lucas: They definitely focus on the Core PCE, which is the preferred inflation gauge for the Fed. That number is at 130.5, slightly up from 130.13. It’s still above their two percent target, but the trajectory matters more than the absolute level. If services stay sticky, the Fed may hold rates steady longer than the market expects. Luna: We heard earlier this week that everyone expects the Fed to hold rates in October. But with Kevin Warsh suggesting they could surprise us, isn't there a risk they move too late? Lucas: That is the danger. If they wait until the service inflation becomes undeniable in the next few CPI prints, they might have to hike aggressively. But right now, with the budget deficit swelling to almost two trillion dollars, political pressure is immense against raising rates further. Luna: Two trillion dollars in debt doesn’t help anyone sleep at night, especially when prices are rising. How does this debt burden interact with our personal cost of living? Lucas: High debt means the government needs to borrow more, which can push up long-term interest rates. Even if the short-term Fed Funds rate stays flat, your mortgage rate or auto loan rate might drift higher. That adds another layer of cost to housing and transportation, reinforcing the sticky services problem. Luna: It’s a vicious cycle. Higher costs lead to higher wages, which leads to higher service prices, which leads to higher inflation expectations. Why hasn’t the wage-price spiral happened yet? Lucas: Because productivity has held up fairly well. Companies haven’t needed to raise wages massively to retain workers, so they’ve absorbed costs through efficiency or by raising prices quietly. But that buffer is running thin. The 6.3 percent wholesale jump is a clear warning sign that margins are being squeezed. Luna: So for the average listener listening to this on their commute, what is the one concrete takeaway they should remember when they look at their bank statement next month? Lucas: Ignore the news headlines about inflation cooling. Look at your fixed costs. Rent, insurance, utilities, and healthcare. Those are the numbers that will dictate your financial health for the rest of 2026. Prepare your budget as if those costs will continue to rise by three to four percent annually. Luna: Practical advice. Don’t let the shiny new gadget sales distract you from the fact that your monthly overhead is creeping up. Lucas: Precisely. The economy is shifting resources away from discretionary goods toward essential services. That is a fundamental change in how money flows through households, and it requires a different strategy for saving and investing. Luna: Before we go deeper into investment strategies, I want to pause for a second. If walking through the economy with us has made something click, consider supporting the show directly. Lucas: We don’t run ads, and we rely entirely on listeners who chip in monthly through buy me a coffee dot com slash fexingo. It’s a small group already keeping this independent journalism alive, and every contribution helps us dig into these complex economic trends for you. Luna: Yeah, it really keeps the lights on and allows us to bring you this kind of detailed analysis without corporate interference. Thank you for considering it. Lucas: Back to the markets. With the Nasdaq down over four percent recently, tech stocks are taking a hit. But the underlying issue remains the same across all sectors. Service costs are the anchor dragging down purchasing power. Luna: It makes you wonder if any asset class is truly safe from this inflationary pressure. Even bonds are struggling with the 10-year breakeven rate sitting at 2.35 percent. Lucas: That breakeven rate tells you what the market thinks inflation will be over the next ten years. At 2.35, investors expect inflation to stay slightly above the Fed’s target. It’s a consensus view that sticky services will keep prices drifting upward slowly but surely. Luna: So staying invested is important, but maybe diversifying away from companies that rely heavily on consumer discretionary spending? Lucas: Smart thinking. Companies that provide essential services—utilities, healthcare providers, infrastructure firms—tend to have better pricing power. They can pass those cost increases onto customers more easily than a retailer selling trendy clothing. Luna: Essential services have the moat. Discretionary goods are fighting for attention in a crowded market. That distinction is going to define the next few years of portfolio performance. Lucas: Exactly. The era of cheap money and cheap goods is ending. We are entering an era where stability comes from owning assets that can command higher prices for essential services. Luna: It’s a sobering shift in mindset. From chasing growth to securing stability. Lucas: And that shift starts with understanding where your own money is going. The CPI data is just a mirror reflecting the choices businesses make. Your budget reflects the consequences. Luna: As we wrap up, I’m curious. Do you think the IMF’s warning about messy forecasting is relevant here? Their debt warnings seem to ignore the structural shifts in service pricing. Lucas: The IMF is looking at global sovereign debt, which is a different beast. But their point stands. Traditional models are failing to predict these sticky service dynamics. If the experts can’t forecast it accurately, regular people need to build buffers for uncertainty rather than relying on perfect predictions. Luna: Building buffers for uncertainty. That is a phrase I will be remembering for a long time. Lucas: Good. Keep an eye on those wholesale numbers next month. If that 6.3 percent trend continues, prepare for another round of service price adjustments. Luna: Thanks for breaking this down. It’s comforting to know there is a logic behind the chaos, even if that logic is frustrating. Lucas: It’s always frustrating until you understand the mechanism. Then it’s just a problem to manage. Stay tuned for next week.