Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Inflation Divide Why Goods Fall but Services Keep Climbing
Transcript
- Lucas: So the June CPI came out last month, and on the surface it looks like good news: headline inflation fell to 332.6 from 333.98. That's a drop. But if you look a little closer, there's a real split happening in the data. Luna: A split meaning what exactly? My dry cleaning bill just went up again, so I'm not exactly feeling that overall drop. Lucas: Exactly. That's the thing. Core CPI — that's excluding food and energy — came in at 336.1, basically flat from the month before. So all the progress in headline inflation is coming from goods: cars, electronics, furniture, things like that. Luna: So goods are getting cheaper, but services — the stuff we pay for every month — are still rising. That's frustrating. Lucas: Right. And it's not just your dry cleaner. Think about auto insurance, medical care, haircuts, even some streaming subscriptions. Those are all services, and they're labor-intensive. Wages have been climbing, and that cost gets passed on. Luna: But wages are rising because the labor market is still tight, right? So is that just the new normal? Lucas: It could be for a while. The unemployment rate has been hovering near historic lows, and minimum wage increases in several states are pushing up the floor. Services are harder to automate than manufacturing, so labor costs feed straight into prices. Luna: And the Fed is stuck between a rock and a hard place. They want to cut rates because goods prices are falling, but services inflation is still running hot. Lucas: Exactly. Look at the fed funds rate — it's been stuck at 3.63 percent since June. The market is expecting cuts later this year, but the Fed can't move until they see services inflation moderate too. Luna: But the bond market seems to think inflation will come down overall. The 10-year breakeven rate dropped to 2.21 percent. That's below 2.26 from a week ago. Lucas: That's the market's expectation for average inflation over the next decade. It suggests that even with sticky services, the overall trend is lower. But that doesn't mean your monthly bills will stop rising tomorrow. Luna: So what's the one service we should watch most closely for a sign that things are easing? Lucas: Rent is the big one. It's the heaviest weight in both CPI and PCE. Rent inflation has been slowing, but it's still positive. If we see rent start to flatten, that would be a big signal. Luna: We covered rent in episode 123, right? But that was a few months ago. Has anything changed? Lucas: A bit. New leases are adjusting lower, but because of how CPI measures rent — it averages in existing leases — it lags. So the improvement we're seeing in real-time won't show up in the official numbers for another six to twelve months. Luna: That's a long time to wait. Meanwhile, I'm still paying more for my haircut and my gym membership. Lucas: And that's the friction. The economy is disinflating, but unevenly. Goods are already in deflation for some categories — look at used cars. But services are lagging by design. Luna: So what does this mean for someone trying to budget for the next year? Lucas: Plan for services to keep rising at a slower pace, but don't expect big drops. And take advantage of goods that are getting cheaper — if you need a new laptop or a couch, now might be a good time. Luna: That's actually useful. But I'm still wondering — why isn't the Fed more worried about this services stickiness? Lucas: They are. The minutes from the last FOMC meeting showed that some members were concerned about sticky services inflation. But the broad view is that as the labor market cools, wage growth will moderate, and so will services. Luna: And the tariff story? We just had a headline about import prices hitting the highest since 2008. Doesn't that threaten to push goods prices back up? Lucas: It could. But so far, the trend in goods has been downward, partly because of strong dollar and weak Chinese demand. Tariffs might slow that decline, but they probably won't reverse it unless we see a lot more escalation. Luna: So the inflation divide might be with us for a while. Lucas: I think so. And that's why the Fed is moving cautiously. They don't want to cut rates too early and reignite services inflation, but they also don't want to keep rates high if goods deflation deepens. Luna: It really does feel like a balancing act. And you know, it's conversations like this that make the economy a little less confusing. Speaking of which — if you've gotten something out of these episodes, a couple of dollars a month genuinely keeps us going. Lucas: Yeah, we keep the show ad-free because of listener support. If you've found yourself understanding the numbers a bit better, you can buy us a coffee buy me a coffee dot com slash fexingo. It really does make a difference. Luna: Absolutely. And to bring it back to the divide — what should we be watching for in the next CPI release? Lucas: I'll be watching the services ex-energy category. If that starts to flatten, it's a sign that the stickiness is breaking. Also, watch for any acceleration in goods prices from tariffs — that could change the whole narrative. Luna: So we've got a key indicator to track. Thanks, Lucas. And thanks to everyone listening — we'll see you next time. Lucas: Until then, keep an eye on the price tags.