Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Chinese Import Surge Hasn't Raised Your Grocery Bill Yet
Transcript
- Lucas: So the June CPI came in at 332.6, down from 333.98, a clear drop. But here's the twist: import prices from China just surged to their highest level since 2008. That's a real disconnect, and it's worth unpacking. Luna: Right — so the stuff we're buying from China is getting more expensive, but overall consumer prices are falling? How does that work? Lucas: Exactly. And that's the kind of paradox that makes this show interesting. If following this economy with us has helped you see through the noise, a small group of listeners already supports the show through buy me a coffee dot com slash fexingo — keeps it ad-free and lets us keep digging into these numbers. Luna: Yeah, it's nice to have a place without commercial breaks. So what's the deal with the Chinese import prices not showing up at the checkout yet? Lucas: Good question. A lot of retailers bought inventory months ago at lower prices, so they haven't had to pass on the higher costs. Plus, they're competitive — they don't want to be the first to raise prices and lose customers. Luna: But that can't last forever, right? I mean, eventually those old inventory batches run out. Lucas: Right, and then we'll see what happens. The new tariffs Trump just announced on July 24 add another layer. Companies have to decide whether to absorb the costs or finally hike shelf prices. The bond market seems to think they'll absorb them — the 10-year breakeven inflation rate dropped to 2.26, suggesting traders expect inflation to stay low. Luna: But is that realistic? If the cost of goods from China is at a sixteen-year high, how can inflation stay low? Lucas: That's the million-dollar question. There's a case that the bond market is too complacent. Right now, the dollar is strong, which helps offset some import costs, and consumer demand might be slowing enough that companies can't raise prices. But if tariffs escalate further, that calculus changes. Luna: So what are the categories most exposed? I'm thinking electronics, clothing, toys — typical Made in China stuff. Lucas: Exactly. Take electronics — we've seen prices fall for years due to productivity gains. But if the import cost surge persists, those gains could be erased. Clothing and footwear see thinner margins, so there's less room to absorb. Retailers like Walmart and Target have some bargaining power, but even they can only do so much. Luna: And this is happening against a backdrop of other inflation drivers. The PCE price index is still rising — it hit 131.5 in May, up from 130.94. So the Fed's preferred gauge isn't falling the same way CPI is. Lucas: Right, the PCE includes services more heavily, and services inflation has been stickier. The core PCE also ticked up. So we've got this mixed picture: goods deflation on one side, services inflation on the other, and now import costs threatening to reignite goods inflation. Luna: That's why the Fed's message is so cautious. Kevin Warsh has been signaling three key phrases that Fed watchers are parsing, and the central bank isn't exactly celebrating the CPI drop. Lucas: Exactly — they're watching the lagged effects of tariffs and import costs. The Fed Funds rate is stuck at 3.63, and the interest on reserve balances hasn't changed. They're waiting to see if the data shifts. If import costs flow through to consumer prices in the fall, we could see a re-acceleration just when everyone thought inflation was beaten. Luna: And that's the scenario the bond market isn't pricing in. The breakeven rate is based on market expectations, but expectations can be wrong. Lucas: There's also the global angle. Singapore just tightened monetary policy in response to rising oil prices, which could rekindle inflation worldwide. So it's not just about China and tariffs — energy costs matter too. Luna: So where does that leave the average person? Do they need to brace for higher prices on things like sneakers and laptops later this year? Lucas: It's possible. But the timeline depends on how quickly retailers work through their existing stock. If demand stays soft, they might keep prices low to move inventory, absorbing higher import costs for a while. But if demand picks up and tariff costs are fully passed through, we could see a bump in goods inflation. Luna: I'm also curious about the two-year delay on generic drug tariffs that Trump announced. That suggests they're aware of the political sensitivity of health care costs. Lucas: Absolutely. They're telegraphing that tariffs will be phased in for things like drugs and essential goods. But for discretionary imports — electronics, clothes — the hit might come sooner. The whole scenario is a test of whether the economy can handle rising import costs without stoking inflation. Luna: And if the bond market is right, we'll see inflation stay contained. But if it's wrong, the next few CPI prints could surprise to the upside. Lucas: Exactly. That's why we're watching August and September data closely. The import price report from July 17 is a leading indicator — if that continues, we'll have to revise our inflation outlook. For now, it's a fascinating standoff between the cost of sourcing goods and the price at the register. Luna: Thanks for breaking that down. I think a lot of listeners will be keeping an eye on their grocery receipts and online orders. Lucas: It's the small details that tell the big story. We'll keep tracking it.