Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the Iran Conflict Is Reshaping Your Inflation Reality
Transcript
- Lucas: If you feel like the stuff you actually buy keeps getting more expensive, even though the official inflation number has cooled — you are not imagining it. And this week, with consumer sentiment hitting a fresh record low and the Iran war rattling energy markets, that gap between the headline CPI and what people feel at the checkout counter is bigger than it's been in years. Luna: Yeah, that's the disconnect we keep hearing from listeners. The government says inflation is like 2.4 percent on the breakeven measure, but your grocery bill is up ten percent. Where's that coming from? Lucas: Right. So let's actually unpack the April CPI data that came out a few weeks ago. Headline CPI sits at 332.4 — that's up from 330.29 in March. That's roughly a 2.5 percent annualised increase, right in line with the Fed's target. But here's the thing: that headline number is heavily weighted by things like rent and medical care, which do have their own inflation stories. Meanwhile, the categories that swing wildly — energy, used cars, food at home — are getting whipsawed by geopolitics and supply chain shocks. Luna: And energy is the big one now with the Iran situation. Oil prices have been volatile, and that feeds into everything from gasoline to shipping costs to the plastic packaging on your cereal box. Lucas: Exactly. And if today's walk through the economy has made something click for you, honestly, if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's what lets us keep doing this without ads or sponsors. Luna: Yeah, listener support really does keep the lights on. And it means we can dig into these numbers without anyone telling us what to say. Lucas: So back to that disconnect. Let's talk about used cars, because this is a perfect example of how a global shock hits your wallet fast. After two years of declining used car prices, they started climbing again in March and April. The Manheim Used Vehicle Value Index was up something like four percent month over month. Why? Because new car production is still constrained by semiconductor shortages — that never fully resolved — and now the Iran conflict is disrupting shipping lanes in the Persian Gulf, which raises costs for imported parts. Luna: And that hits lower-income households hardest. If you need a reliable used car to get to work, a fifteen percent price jump is not 'transitory.' It's a real budget crunch. Lucas: Absolutely. And the same logic applies to food. The FAO Food Price Index has been creeping up again, mostly on grains and vegetable oils, because the war is threatening exports from the region. That doesn't show up in the core CPI, which strips out food and energy. So if you're listening and thinking, 'Core CPI is 2.3 percent, but my grocery bill is up eight,' you're right. The core measure is designed to capture underlying trends, not what you actually spend. Luna: Right. And the Fed focuses on core because it's less noisy. But for households, food and energy are the biggest line items. So when the Fed says inflation is under control, it feels like gaslighting. Lucas: Exactly. And that's why consumer sentiment hit a record low last week, according to the University of Michigan survey. The preliminary May reading was something like 55.3 — lower than the 2022 peak of inflation pain. People are looking at their bank statements, not the CPI basket. Luna: Let's talk about that basket for a second. The CPI weights are based on spending patterns from a couple years ago, right? So if rent is 30 percent of the index but energy is only 7, but your personal spending is the reverse because you drive a lot and live in a paid-off house, the CPI understates your inflation. Lucas: That's the core of the disconnect. And the Bureau of Labor Statistics does update the weights annually now, but there's always a lag. Plus, the substitution bias — if beef gets expensive, the CPI assumes you switch to chicken. But not everyone can or wants to switch. So the official number understates the pain for people who don't change their habits. Luna: And now with the Iran war, we're seeing a renewed spike in shipping costs. The Baltic Dry Index is up again, and that means everything from electronics to furniture is going to get more expensive in the next few months. That's not in the April CPI yet. Lucas: Right. Because CPI measures prices actually paid, not input costs. So there's a lag of two to three months before shipping cost increases show up on store shelves. We're probably looking at a bump in the June and July reports. Luna: So what does that mean for the Fed? They meet again in June. The fed funds rate is at 3.62 percent right now, effective rate 3.64. Are they going to hold, or does this change anything? Lucas: I think they hold. The breakeven inflation rate — that's the market's expectation for CPI over the next ten years — is at 2.40 percent, basically unchanged from last week. So bond markets aren't panicking. The Fed's preferred measure is core PCE, which is running around 2.2 percent annualised. They're not going to react to one or two months of energy noise. But if the war drags on and starts feeding into core goods via supply chains, that's when they might start talking about a pause or even a cut. Luna: Interesting. So the message is: the official inflation picture is okay, but the lived experience is not. And that's why people are so down on the economy even though GDP is growing and unemployment is low. Lucas: Exactly. The macro numbers are fine, the micro is painful. And until that gap closes — either through wages catching up or prices actually falling in the categories people buy most — you're going to see that sentiment stay low. I think the real question is whether the Fed can manage a soft landing if energy prices stay elevated and consumer confidence keeps deteriorating. Luna: And that's the million-dollar question. Thanks, Lucas. I think we gave people some concrete numbers to watch. Lucas: Absolutely. Keep an eye on the May CPI release in mid-June, and watch the shipping cost indices. That's where the next inflation story is being written.