Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Supply Chain Price Tag Fueling Modern Stagflation
Transcript
- Lucas: Look at the latest New York Fed report saying that inflation on many everyday items was entirely due to tariffs. That’s a sharp distinction, but it begs a deeper question about what happens when those tariff shocks meet a supply chain that hasn’t actually fixed its underlying fragility. Luna: Right, because tariffs are just the spark. The fuel is still those persistent logistical bottlenecks that keep shipping and handling costs elevated even when demand cools off. Lucas: Exactly. We’re seeing core PCE hold at one hundred thirty point five for August, which sounds stable, but look at the composition. Goods prices aren’t falling as fast as they should given that real GDP growth has slowed to two point two percent annualized. If the economy were truly cooling, goods deflation should be offsetting services inflation. It isn’t. Luna: It’s like the system is stuck in neutral. You’ve got slower growth but prices aren’t dropping because the physical movement of goods is just too expensive right now. Lucas: Precisely. And consider the labor market data from September. Unemployment ticked up to four point two percent, yet average hourly earnings still rose. More importantly, job openings dropped to seven thousand seventy nine thousand. That decline suggests employers are pulling back on hiring, likely because they can’t afford to expand capacity or inventory buffers. Luna: So companies are shrinking their workforce to protect margins, which means less volume moving through the system, which drives up per-unit logistics costs. It’s a vicious cycle. Lucas: That’s the trap. When you combine rising wage pressures with static or declining volume, your unit cost per shipped item goes up. I’ve been looking at some internal models where warehousing costs have effectively become a permanent tax on retail margins. It’s not just about the price of the widget; it’s about the cost of storing it while waiting for the next shipment. Luna: And that storage cost gets passed directly to the consumer, keeping that headline CPI at three hundred thirty four point one even if the underlying trend is flattening. Lucas: Right. And notice the ten-year breakeven inflation rate has dipped slightly to two point thirty three percent. The markets are betting that the Fed will eventually win, but the real-time data tells a different story. The friction is still there. It’s just being absorbed by corporate balance sheets before it hits the final sticker price. Luna: But eventually those balance sheets run out of room. When do you think the squeeze becomes visible in the broader consumer basket? Lucas: I suspect it’s already visible if you know where to look. Look at the small-cap index, the Russell two thousand. It’s down one point four percent over the last five days. Small businesses don’t have the hedging tools or the global supply networks that giants do. They feel these logistics spikes first. If they can’t absorb the cost, they raise prices, and then everyone else follows. Luna: So the pain starts at the bottom of the pyramid and ripples upward, making the whole economy more expensive without any single company necessarily wanting to drive that hike. Lucas: Correct. It’s structural, not cyclical. The Federal Reserve can lower rates all they want, but if it costs more to move a container from Los Angeles to Chicago than it did in twenty nineteen, rate cuts won’t fix that. They might even make it worse by encouraging more spending on goods that are harder to deliver efficiently. Luna: That’s a terrifying thought. Rate cuts stimulating demand for products that literally can’t get to shelves cheaply. It’s stagflation in motion. Lucas: It is. And this brings us back to the tariff angle. The NY Fed noted that recent inflation spikes were tied to tariffs. But tariffs are just a tax on cross-border movement. They exacerbate an already broken domestic distribution model. We’re trying to patch a digital-age problem with twentieth-century infrastructure. Luna: We built warehouses in places that made sense for trucking routes in the nineties, not for e-commerce velocity today. Now every order is a mini-logistics nightmare. Lucas: And the cost of capital for building new, efficient facilities is rising. So expansion is stalling. We saw nominal GDP grow to thirty two trillion five hundred sixty three billion dollars, but real output only grew by two point two percent. That gap is the inefficiency premium. It’s the cost of doing business in a fragmented supply chain. Luna: So the 'inefficiency premium' is basically the hidden tax keeping our standard of living lower than it could be. We’re working just as hard, maybe harder, but getting fewer goods for our money because of these middlemen costs. Lucas: Exactly. And here’s the kicker: initial jobless claims dropped to one hundred ninety seven thousand. That looks good on paper, but combined with falling job openings, it suggests a tightening labor market that isn’t creating new capacity. It’s just conserving existing talent. Companies are hoarding workers rather than investing in automation or logistics tech because the ROI is unclear in this volatile environment. Luna: Hoarding labor instead of fixing the pipes. That’s exactly why productivity has been so stagnant. You can’t automate what you’re too afraid to restructure. Lucas: Right. And this fear is compounded by the uncertainty around trade policy. With the Treasury bringing in advisors like Judy Shelton, who has controversial views on monetary policy, the market is jittery. Uncertainty delays investment. Delayed investment means no new trucks, no new ports, no new algorithms. Just the same old bottlenecks, priced higher. Luna: So political noise adds another layer of friction to an already clogged system. Investors sit on their hands, waiting for clarity that isn’t coming. Lucas: Waiting for clarity that may never come in a linear fashion. We need to accept that logistics costs are a permanent feature of this economic era. The question is whether we adapt our pricing models or let inflation erode our purchasing power until we break. Luna: I’m worried we’re going to break before we adapt. Consumers are already stressed, with debt problems flashing warnings since the Great Recession. How much more can they take? Lucas: They can’t take much more. Which is why the Fed is in such a bind. Raise rates too high, and you crush consumer debt holders. Keep them low, and you let the logistics inflation bake in permanently. It’s a lose-lose scenario unless something changes structurally. Luna: Unless someone reinvents the wheel. Or the truck. Or the algorithm. Lucas: Or until the geopolitical landscape shifts enough to open new corridors. But that’s outside our control. For now, we watch the numbers. Core PCE at one hundred thirty point five. Unemployment at four point two. These aren’t just digits. They’re symptoms of a system struggling to breathe. Luna: And until those lungs expand, we’re stuck paying more for less. It’s a sobering way to end the week. Lucas: It is. But understanding the mechanics helps us prepare. Whether you’re running a business or balancing a household budget, recognizing that logistics is the new frontier of inflation is crucial. It’s not just about what you buy; it’s about how it gets to you. Luna: So the next time you see a price hike, check the shipping label. The answer might be hiding in the transit time. Lucas: Smart observation. And if walking through the economy with us has made something click, remember that listener support is what keeps these conversations ad-free and independent. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. It’s a small gesture, but it makes a real difference in maintaining the quality and depth of the research we put into every episode. Luna: Yeah, it really does help us dig deeper into these complex issues without cutting corners. Thanks for supporting the show. Lucas: Back to the data: as we head into Q4, watch the PCE price index closely. If it stays above one hundred thirty point five while growth remains at two point two percent, we’ll know the supply chain issue has officially metastasized into full-blown stagflation. Luna: One number to watch, one threshold to respect. Stay sharp, everyone. Lucas: Until next time, keep questioning the curve.