Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Pet Industry
Transcript
- Lucas: Luna, I want to talk about something that hits close to home for a lot of people — the pet industry. And specifically, how stagflation is quietly reshaping the way we feed, treat, and insure our animals. Luna: I've definitely noticed my own dog food bill creeping up. But is this really a stagflation story, or just regular inflation? Lucas: Great question. It's both, but stagflation adds a twist. Look at the latest Core PCE reading — the Fed's preferred inflation gauge hit three point four percent in May, the highest since October 2023. And the unemployment rate is holding at four point three percent with growth slowing. That's the classic stagflation combo: rising prices and a softening labor market. Luna: So consumers are getting squeezed from both sides. How is that playing out in the pet aisle? Lucas: The pet industry has been a growth machine for decades. Americans spent over one hundred fifty billion dollars on their pets in 2025. But now we're seeing a clear trade-down effect. Pet owners are switching from premium brands like Blue Buffalo or Hill's Science Diet to private-label kibble from Walmart or Costco. Luna: I've definitely made that switch myself. The store brand is about thirty percent cheaper. Lucas: Exactly. And it's not just food. Veterinary care is another big one. Routine checkups and vaccinations are still happening, but elective procedures — dental cleanings, orthopedic surgeries, even some allergy treatments — are being postponed. The American Veterinary Medical Association reported a five percent drop in overall vet visits in the first quarter of 2026 compared to last year. Luna: That's concerning. If people delay care, it could lead to bigger health problems down the road — and higher costs later. Lucas: Right. And pet insurance is another area where we're seeing pullback. Pet insurance premiums have risen about fifteen percent year over year, partly because of inflation in veterinary costs. So some owners are dropping coverage or opting for lower-tier plans with higher deductibles. Luna: I've heard of people self-insuring — just setting aside a small monthly amount instead of paying a premium. But that only works if nothing catastrophic happens. Lucas: Exactly. And that's the gamble. The big players in this space — Mars Petcare, Nestlé Purina, General Mills with Blue Buffalo — they're all watching these trends closely. Mars, for example, has been investing heavily in veterinary clinics and pet insurance through its Banfield and VCA chains. But if consumers tighten further, even those segments could feel the pinch. Luna: So what's the bottom line? Is the pet industry recession-proof the way people used to think? Lucas: It's not recession-proof, but it's recession-resistant. People don't abandon their pets. They find ways to cut costs — cheaper food, fewer extras, less insurance. The industry is still growing, but the growth is shifting from premium to value. And that's a structural change that could persist even after inflation eases. Luna: It's interesting — and a little sad — how something as emotional as pet care gets rationalized when budgets tighten. Lucas: Speaking of budgets, I want to mention something real quick. 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 episodes. If walking through the economy with us has made something click, that's the place to keep it going. Luna: Yeah, it's a small group, but it makes a big difference. We don't run ads, so it's really listener-powered. Lucas: Exactly. So back to the pets. I think the key takeaway is that stagflation is forcing a kind of 'pet recession' within the broader economy. We're seeing it in the data: pet food dollar sales are up, but volume is flat or declining, which means people are paying more for the same amount or less. Luna: Right, that's the classic sign of inflation — higher prices masking weaker demand. I saw that the May CPI for pet food was up six point two percent year over year. Lucas: That's a great data point. And the overall CPI in May hit three hundred thirty-four, up from three hundred thirty-two point four in April. So pet food inflation is outpacing the broader basket. That's a real squeeze. Luna: What about the supply side? Are there any bottlenecks or input cost pressures that are specific to pet food? Lucas: Yes. A lot of pet food ingredients — chicken, corn, wheat — have been volatile due to weather and energy costs. And transportation costs are still elevated. So manufacturers are passing those through. But the bigger story is demand elasticity. When people are uncertain about their jobs and their purchasing power, they trade down fast. Luna: So if the unemployment rate ticks up from four point three percent, we could see even more switching. Lucas: Exactly. And that's the stagflation risk. We're not in a full-blown recession yet, but real GDP growth annualized was just two point one percent in Q1, and that's down from prior quarters. If growth slows further while inflation stays sticky, the pet industry will have to adapt. Luna: What about the consolidation trend? Are big companies like Mars using this moment to buy up smaller competitors? Lucas: They are. Merger and acquisition activity in pet care has been steady. Mars acquired a chain of veterinary hospitals in the UK last year. Nestlé has been expanding its premium pet food lines but also pushing its value brands like Purina ONE. They're hedging their bets. Luna: It makes sense. They want to capture both the premium pet parent and the budget-conscious one. Lucas: Right. And the independent pet stores are feeling the squeeze. They can't compete on price with Amazon or big-box retailers, so they try to differentiate on service and expertise. But when customers are price-sensitive, that's a tough sell. Luna: I've seen some local pet stores adding grooming or training services to make up for lower product margins. Lucas: That's a smart move. Services have higher margins and are harder to replace with a click. But even there, customers might cut back on grooming if money is tight. Luna: So what's the forecast for the rest of 2026? Are we going to see a further slowdown in pet spending? Lucas: The data suggests continued caution. Job openings in the JOLTS report are still around seven point six million, which is healthy, but initial jobless claims dropped to two hundred fifteen thousand — that's actually good news. Still, wage growth is modest, at thirty-seven dollars and fifty cents average hourly earnings, and that's not keeping up with inflation for many households. Luna: So the pet industry is essentially a mirror of the broader consumer economy. If people feel good, they spoil their pets. If they feel squeezed, they tighten up. Lucas: Exactly. And that's what makes this a perfect stagflation case study. It's not a collapse — it's a slow, grinding adjustment. And the winners will be the companies that can offer real value without sacrificing quality. Luna: And the losers might be the premium-only brands that can't adapt. Lucas: Right. We'll be watching that space closely. Luna, any final thoughts? Luna: Just that maybe our pets are teaching us something about resilience. They don't care if it's premium or store brand — they just want to be fed and loved. And in a stagflation environment, maybe that's a lesson for all of us. Lucas: Well said. That's all for this episode. We'll be back soon with another look at how stagflation is reshaping the economy.