Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Wholesale Prices Signal Consumer Pain Ahead
Transcript
- Lucas: So yesterday the Bureau of Labor Statistics dropped the May Producer Price Index, and it was a bit of a jaw-dropper. Wholesale prices rose one point one percent in a single month — way above the consensus estimate of around point three percent. That is the biggest monthly jump since August 2023. Luna: And just to connect the dots for people — the Producer Price Index measures what businesses pay for goods at the wholesale level. So this is inflation before it reaches the retail shelf. Lucas: Exactly. And the market reaction was telling — yields on the ten-year Treasury ticked up about six basis points after the release. Bond traders immediately started pricing in a higher probability that the Fed stays on hold through the summer. Luna: I want to get to the energy component because that seems to be the real driver here. But first — Lucas, you and I talk about this stuff every day, and I know a lot of our listeners are genuinely trying to make sense of how these numbers affect their own budgets. If you've found our show helpful in navigating the economy, and you'd like to support keeping this conversation ad-free and accessible to everyone, you can do that at buy me a coffee dot com slash fexingo. It's a simple way to chip in. Lucas: And we genuinely appreciate it — it's what keeps us going. So, back to that energy jump. The BLS said wholesale energy prices surged nearly nine percent in May. That is almost entirely tied to the spike in crude oil after the Iran conflict escalated. Luna: Right, and that's what is now feeding into the ECB's decision yesterday to hike rates for the first time since 2023. They're trying to get ahead of the energy pass-through. Lucas: Which is the key question for the US too. Wholesale energy costs typically take one to two quarters to fully show up in consumer prices. So the May PPI is basically a warning shot for what we might see in the CPI numbers for July and August. Luna: But not every wholesale cost gets passed along, right? Retailers and manufacturers often absorb some of it, especially in competitive categories. Lucas: That's the nuance. If you look at core PPI — which strips out food and energy — that was up only point three percent month over month. So the inflation pressure is really concentrated in energy. The question is whether that concentrated shock spreads. Luna: And energy touches everything. It's in the cost of transporting goods, running factories, heating stores. So even if only energy prices are spiking now, the ripple effects eventually hit a much broader set of goods. Lucas: Exactly. Think about a company like Procter and Gamble. They make toothpaste, detergent, diapers. They have massive logistics networks that run on diesel. If diesel prices go up ten percent, they have to decide whether to raise prices or squeeze margins. And their CFO said on the last earnings call that they're watching wholesale energy costs closely. Luna: So the PPI data is essentially telling us that companies are facing higher input costs right now. The CPI data from May — which came out last week and showed headline inflation at four point two percent — already reflects some of that. But the PPI suggests future CPI prints could be even higher if energy stays elevated. Lucas: And that's the real concern for the Fed. The fed funds rate is at three point six three percent effective. That's well below where it was a year ago, but it's still restrictive. The problem is that inflation is running above that rate, so real rates are negative. That's not a great place to be if you're trying to cool the economy. Luna: I want to look at a specific category that often gets overlooked: wholesale used car prices. The Manheim Used Vehicle Index was up about one percent in May, but that's actually decelerating from earlier this year. So there's some good news there. Lucas: And that's consistent with what we're seeing in the CPI used car component — it's actually been deflationary in recent months. But the wholesale to retail lag means that if energy costs push up transportation and reconditioning costs, that could reverse. Luna: So what's your base case for where headline CPI is three months from now? Do you think we see it go above four point five percent? Lucas: I think four point five is plausible if crude stays above ninety dollars a barrel. But a lot depends on what happens in the Middle East. If there's a ceasefire or a production increase from OPEC, we could see energy prices retreat quickly. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — has actually fallen to two point two nine percent, which suggests bond traders think this energy shock is transitory. Luna: Though transitory is a loaded word after 2021. The Fed used that term and then had to reverse course. Lucas: Fair point. But structurally, the US economy is less energy-intensive than it was twenty years ago. So the pass-through from oil to core inflation might be smaller than in past cycles. Still, the PPI data is a clear yellow flag — not a red one yet, but definitely a yellow flag for anyone watching inflation. Luna: What about the wholesale food component? That was up point six percent in May, driven largely by grains and vegetable oils. That's partly because of the war in Ukraine still affecting supply chains, but also because of drought conditions in parts of the US. Lucas: And that's the kind of inflation that hits lower-income households hardest because they spend a larger share of their budget on food. The CPI food at home index was up two point eight percent year over year in May. If wholesale food costs keep rising, that number could head toward three point five or four percent. Luna: So when we talk about the PPI being a leading indicator, it's not just about fuel. It's about the whole basket of inputs that go into making and moving everything we buy. Lucas: Right. And that's why economists pay so much attention to it. The PPI gives you a peek under the hood before the CPI numbers confirm what's happening. The May PPI is basically telling us that the engine is running hot. Luna: Alright, so bottom line for our listeners: we are likely looking at another few months of elevated CPI prints, at least as long as energy stays elevated. If you're budgeting for the second half of 2026, plan for gas and heating costs to be higher than they were in the first half. Lucas: And keep an eye on the PPI releases each month. They come out a few days before the CPI, so they give you a sneak preview. If you see another month of wholesale prices jumping by more than half a percent, it's a good bet that consumer prices will follow. Luna: Good practical takeaway. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of Inflation Explained. We'll be back tomorrow with another angle on the numbers that shape your wallet.