Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Tariff Tax on Your Grocery Bill
Transcript
- Lucas: If you have been staring at your grocery receipt lately, you probably noticed something odd. The overall inflation rate might be cooling, but the items on that shelf seem to be getting more expensive anyway. That disconnect is exactly what the New York Fed highlighted in their latest analysis released just yesterday. They found that a significant portion of the recent uptick in consumer prices is not coming from runaway demand or wage spirals, but from tariffs. Luna: So we are seeing a direct pass-through from trade policy to the checkout counter? That feels different from the usual supply chain bottlenecks we saw a few years ago. Lucas: Exactly. It is a mechanical shift in cost structure rather than a cyclical one. When the government adds a tax on imports, that cost doesn’t just sit there. Retailers and manufacturers have to decide whether to absorb it or pass it to you. Right now, they are passing it. And because these tariffs often target broad categories of goods, the effect shows up immediately in the headline CPI number. Luna: It makes sense that the headline number would jump, but does this mean the Federal Reserve is going to react by raising interest rates even higher? Lucas: That is the tricky part. The effective federal funds rate is currently sitting at three point seven five percent, and the overnight rate has edged up to three point eight eight percent. The Fed generally looks through temporary price shocks caused by fiscal policy like tariffs. But when those shocks become persistent, it complicates their job. We are seeing the ten-year breakeven inflation rate hold steady at two point three six percent, which suggests markets aren’t panicking yet, but consumers definitely are feeling it. Luna: I think about my own wallet when I hear that. If I am buying imported electronics or clothing, I feel that price hike every single month. Lucas: And that is the human side of the data. Let’s look at the actual numbers from August. The all urban consumer CPI came in at three hundred thirty-four point one, up from three hundred thirty-two point eight the previous month. Core CPI, which strips out food and energy, was at three hundred thirty-seven point eight. Those are modest monthly jumps, but they add up fast when you are paying for things that have already been taxed at the border. Luna: It is interesting that core inflation is still moving. Usually, tariffs hit goods first, so shouldn’t core services be less affected? Lucas: You are right to spot that distinction. Goods prices are volatile because they include those tariff effects. Services, like haircuts or insurance premiums, tend to be stickier and driven by labor costs. But here is the nuance: when goods get more expensive due to tariffs, it can create a ripple effect. Workers ask for raises to cover their higher cost of living, which then feeds back into services inflation. It is a secondary transmission mechanism. Luna: So even if the Fed keeps rates steady, the tariffs themselves are doing the heavy lifting on inflation right now? Lucas: Precisely. It is a fiscal shock masquerading as a monetary problem. The IMF chief recently talked about how AI could help manage these efficiency challenges, but right now, the immediate driver is simple arithmetic. Tax goes up, price goes up. The challenge for policymakers is that they cannot easily reverse a tariff without political capital, but they also don’t want to keep borrowing money to fight inflation if the cause is external. Luna: It feels like we are trapped in a loop where the tools we usually use to control inflation are blunt against this kind of specific price hike. Lucas: Blunt is the right word. Raising interest rates further would crush demand across the board, including sectors that have nothing to do with imports. That is why the Fed is likely to hold its course for now. They are watching to see if these price hikes are truly sticky or if retailers will eventually eat the margin to stay competitive. But for you and me, waiting for a margin squeeze is a luxury we do not have. Luna: No, we just have to adjust our budgets. Which brings us to the reality of how people are actually coping with this shift in the cost of living. Lucas: They are trading down. We are seeing a clear shift in consumer behavior toward value brands and private labels. This is happening alongside a rise in inflation expectations. The Fed’s survey showed that one-year inflation outlooks hit their highest level since May twenty-twenty-three. People are worried. And worry changes spending habits faster than any interest rate change ever could. Luna: It is fascinating how psychology interacts with these hard numbers. Even if the CPI says inflation is slowing, if I expect prices to keep rising, I buy sooner. Lucas: That forward-looking behavior is what keeps central banks awake at night. If expectations become unanchored, you get a self-fulfilling prophecy. But right now, the anchor is being pulled by tariffs. The question is whether the market can absorb this shock without a broader recession. The small-cap index, the Russell twenty-fifty, is down one point four percent over the last five days, suggesting some nervousness about domestic demand. Luna: Small caps are more sensitive to domestic economic health, so that dip makes sense given the uncertainty. Lucas: It does. And gold is holding around four thousand one hundred forty-nine dollars, which is a classic hedge against currency debasement and policy uncertainty. Investors are parking money in safe havens while they wait to see if the Fed decides to intervene more aggressively. Luna: But intervention seems unlikely given that the root cause is political, not monetary. Lucas: Correct. The Fed is constrained. They can only influence the speed of the economy, not the direction of trade policy. So we are left with a period of elevated volatility in prices, specifically for traded goods. This is going to be the defining feature of the rest of twenty-twenty-six until either the tariffs are adjusted or consumer demand collapses enough to force retailers to stop passing them on. Luna: Collapse seems extreme. More likely we just see a gradual adjustment in what we consider normal prices. Lucas: Or a normalization of lower purchasing power. Either way, the era of cheap imported goods is paused. For businesses, this means inventory management becomes critical. You want to stock up before another round of tariffs hits. For consumers, it means budgeting for variance rather than stability. Luna: Variance is a scary word for a household budget. It implies you never know what the final bill will be. Lucas: It does. And that uncertainty is costly. It slows down big purchases like cars or appliances because you are unsure of the total landed cost. We are seeing a slowdown in durable goods sales as a result. People are hesitating, which eventually drags on the wider economy. Luna: So the tariff benefit to domestic producers might be offset by the drag on consumer confidence. Lucas: Almost certainly. It is a zero-sum game in many ways. You gain protection for local industry, but you lose efficiency for the consumer. The net effect is usually higher prices and slightly lower growth. That is the trade-off we are living with right now. Luna: It makes me wonder if there are any sectors that are actually benefiting from this environment besides the protected industries. Lucas: Domestic manufacturing is the obvious beneficiary. If imports become more expensive, local production becomes relatively cheaper. We might see a slow rebalancing toward homegrown goods. But that takes time. Factories need to expand, workers need to be hired. In the short term, it is just pain at the register. Luna: Pain that feels very real to anyone trying to plan for retirement or save for college. Lucas: Absolutely. Savings rates might look okay on paper if nominal wages are growing, but real wages are shrinking when prices rise faster than income. That is the hidden erosion happening right now. You are working just as hard, but your dollar buys less than it did twelve months ago. Luna: It is a subtle drain that compounds over time. One thing I want to mention before we move on is how important it is to support independent journalism that breaks down these complex economic shifts. Lucas: Right. If walking through the economy with us has made something click, we want to thank our listeners for keeping this network running. Support from people like you is what allows us to dig into the data and bring you these deep dives without ads cluttering the experience. If you find value in our analysis, you can support us directly at buy me a coffee dot com slash fexingo. It helps us keep the lights on and the research thorough. Luna: Yeah, it really does make a difference. We appreciate every bit of support that keeps this show free and focused on the facts. Lucas: Back to the economics. So if we assume tariffs remain static for the next quarter, where do we see the PCE index going? The Personal Consumption Expenditures price index is at one hundred thirty-one point six, up from one hundred thirty-one point one seven. Luna: It is creeping up slowly. Not explosive, but persistent. Like a fever that won't break. Lucas: Exactly. And the core PCE, which is the Fed’s preferred gauge, is at one hundred thirty point five. The fact that both headline and core are moving suggests this is not a one-off glitch. It is a structural shift in the price level. We are not just seeing inflation; we are seeing a step-change in costs. Luna: A step-change is harder to come down from. It requires a bigger correction in demand to bring prices back. Lucas: Which is why the Fed is cautious. They don’t want to trigger a sharp correction. They are hoping for a soft landing where prices stabilize at this new, higher level rather than crashing down. But history shows that stabilizing at a higher plateau is difficult once expectations have shifted upward. Luna: It feels like we are in a holding pattern. Waiting for the next data point to tell us which way the wind blows. Lucas: We are. And that ambiguity is the most stressful part for investors and households alike. You are making decisions based on incomplete information. Do you lock in a mortgage rate now? Do you buy that car? Do you hire that employee? All these decisions are clouded by the tariff variable. Luna: Clouded is an understatement. It feels like playing chess while someone keeps changing the rules of the board. Lucas: That is a perfect analogy. And the players on the board—the CEOs, the policymakers—are trying to adapt. But adaptation takes time. In the meantime, you are left navigating the chaos with your own resources. Luna: Which means staying informed is your best defense. Understanding why prices are moving helps you anticipate the next move. Lucas: Exactly. Knowledge reduces anxiety. When you understand that your grocery bill is up because of a tariff, not because the baker is greedy, you can better assess whether this is temporary or permanent. And that assessment drives smarter financial choices. Luna: Smarter choices in a volatile market are worth more than any guaranteed return. Lucas: Well said. As we head into the end of the quarter, keep an eye on the next CPI release. If those numbers continue to climb, watch for signals from the Fed about whether they view this as transitory or entrenched. Until then, budget for the variance. Luna: Variance it is. Thanks for breaking this down, Lucas. Lucas: My pleasure. Let’s see how the market reacts to this news tomorrow.