Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Services Inflation Is Stickier Than Goods Prices
Transcript
- Lucas: If walking through the economy with us has made something click, remember that a couple of dollars a month is genuinely what keeps these shows ad-free and independent. You can support the network directly at buy me a coffee dot com slash fexingo. Luna: Thanks for the reminder. It really does help keep the research sharp. Now, let's get back into it because there is a weird disconnect happening in the price data right now. Lucas: Right, and that’s exactly where we need to drill today. Look at the latest numbers. The headline CPI came in at three hundred thirty-four point one for August, which is up slightly from the prior month. But if you strip out food and energy to get to core CPI, you’re sitting at three hundred thirty-seven point eight. That number isn’t dropping fast enough for comfort, but here is the real puzzle: why does your weekly shop feel cheap while your life feels expensive? Luna: It’s the classic goods versus services split. I went to get my car serviced last week, and the quote was nearly double what it was twelve months ago. Yet I just bought a new blender on sale. Lucas: Exactly. The blender is a manufactured good, subject to global supply chains, shipping container rates, and automated manufacturing efficiencies. The mechanic? He is a human being charging an hourly rate that is tethered to local labor markets. Inflation used to be about the price of oil or wheat. Today, it’s about the price of time and expertise. We are seeing a structural shift where goods deflation is masking persistent services inflation. Luna: So the Fed is fighting a war on two fronts, but the weapons they have—interest rates—are blunt instruments. They can raise rates to cool demand for cars, but how do you cool demand for a plumber or a nurse? Lucas: You mostly can’t, not without causing a recession that destroys jobs entirely. That’s the trap. When you raise the federal funds rate, which is currently hovering around three point six percent, you make borrowing expensive. This hits housing, autos, and big-ticket durable goods immediately. But services like healthcare, education, insurance, and home repair are largely cash-flow businesses or regulated monopolies. Their pricing power comes from scarcity of skilled labor, not credit cycles. Luna: Which means even if the stock market rallies—as the NASDAQ did recently—the average person doesn’t feel the relief. Their rent and their insurance premiums don’t care about tech earnings. Lucas: Precisely. And look at the PCE price index, the Fed’s preferred gauge. Core PCE is at one hundred thirty point seven. It’s sticky. The reason is simple: services are labor-intensive. A haircut cannot be made more efficient by a better algorithm in the same way a microchip can. Every time you pay for a service, you are paying a wage. And as long as wages keep rising to match the cost of living, those service prices stay high. It’s a wage-price loop, but it’s narrower than the old macro model suggested. Luna: I read that Goldman Sachs is noting consumer sentiment is in the dumps despite the solid economic backdrop. Is that because people are just tired of seeing prices go up, even if the rate of increase has slowed? Lucas: It’s deeper than fatigue. It’s about predictability. When you buy a TV, you know the price will drop next Black Friday. When you hire a contractor, you know the price will only go up. The asymmetry of risk has shifted to the consumer. We’ve seen transport companies sounding alarms on fuel prices, which feeds directly into service costs like delivery and logistics. But the bigger driver is the professional class. Legal fees, financial advice, specialized consulting—these are all inflating faster than general CPI because the talent pool is tight. Luna: That makes sense. So when we talk about inflation cooling, we’re really talking about goods cooling. The services component is where the real pain lives for middle-class households. Lucas: And it’s getting worse because of the aging population. Healthcare and elder care are massive service sectors. As demographics shift toward older consumers who spend more on health and less on discretionary goods, the aggregate price level rises. You can’t automate a geriatric nurse. You can’t import them easily due to licensing barriers. So the supply curve is inelastic. That means any increase in demand pushes prices straight up. Luna: So the solution isn’t just lower interest rates. It’s about productivity gains in services. But aren’t we seeing AI start to eat into some of those white-collar service jobs? Lucas: We are, but it’s early days. AI is great at generating text or analyzing spreadsheets, but it hasn’t yet solved the problem of physical-world services. It might help a lawyer draft a contract faster, lowering the cost of legal services eventually, but right now, the premium is on trust and liability. Until AI can take legal responsibility, the human hour remains expensive. For now, the technology is augmenting workers, not replacing them, which means wages stay high. Luna: Interesting. So instead of displacing labor, AI is making labor more productive, but firms are keeping the margin rather than passing savings to consumers. Is that the dynamic? Lucas: Spot on. Margins have been robust for many service firms because they’ve had pricing power during the pandemic years. They didn’t pass efficiency gains to customers; they kept them as profit. Now that volume is normalizing, they’re hesitant to cut prices because their input costs—labor, insurance, commercial rent—are still rising. Commercial rent alone is a huge component of service overhead. Luna: And with the VIX still elevated and geopolitical tensions affecting supply chains, that overhead isn’t going down anytime soon. Lucas: Correct. Let’s look at the ten-year breakeven inflation rate, which sits at two point three three percent. That’s flat, but it’s above the Fed’s two percent target. Markets are telling us that investors expect inflation to remain persistent. If you’re a business owner in a service sector, you’re pricing in that expectation. You’re not betting on deflation; you’re betting on stability at a higher plateau. Luna: So for the listener trying to budget, what’s the takeaway? Should they stop expecting prices to fall back to pre-pandemic levels? Lucas: Yes. The era of falling goods prices and rising service prices is likely the new normal for the next few years. You should expect your grocery bill to fluctuate based on harvest yields and trade policies, but your rent, your insurance, and your medical bills to trend upward steadily. It’s a different kind of inflation. It’s not the shock of a sudden spike; it’s the slow grind of structural costs. Luna: That sounds exhausting. How do people protect themselves against that kind of inevitable rise in service costs? Lucas: You hedge with assets that appreciate faster than services. Real estate, equities, and yes, even gold, which rallied over two percent in the last five days. Gold is a bet on currency debasement and persistent inflation. But for most people, it’s about locking in fixed costs. Refinance your mortgage if you can. Lock in a fixed-rate insurance policy if possible. Avoid variable-rate debt because your income needs to grow faster than your service expenses to maintain purchasing power. Luna: Locking in fixed costs is smart. Because once you’re locked into a high service rate, it’s hard to get out. Like a gym membership or a software subscription that auto-renews at a hike. Lucas: Exactly. Subscriptions are the ultimate service inflation trap. They’re recurring, they’re often essential, and they’re invisible until you check your bank statement. Companies love them because they create predictable revenue streams that allow them to raise prices quietly. We’ve all felt that subtle fifteen percent bump on our streaming or cloud storage bills. It’s small individually, but it adds up to a significant drag on disposable income. Luna: It’s the death by a thousand cuts. And since these are all services, they don’t benefit from the global competition that drives down electronics prices. Lucas: Right. A laptop is sold globally. A therapist is sold locally. Local markets are inefficient. They have high entry barriers, licensing requirements, and limited scale. That inefficiency is baked into the price. Until we see massive regulatory changes or technological breakthroughs in robotics, local services will remain the inflationary anchor of our economy. Luna: So the Fed is essentially waiting for the goods side to deflate enough to offset the services side, hoping the average comes down to two percent. But is that mathematically realistic? Lucas: It’s optimistic. The basket weights matter. If services make up sixty percent of the CPI basket, and goods are forty percent, then goods would need to deflate significantly to pull the whole average down. That’s unlikely given current supply chain resilience. Instead, we’ll probably see a bumpy path where the headline number stays between three and four percent for longer than markets hope. Luna: That changes how we think about saving. If returns on cash are around three point nine percent, but inflation is running at three point five percent, we’re barely breaking even in real terms. Lucas: You’re losing ground. And if you invest in bonds, you’re exposed to duration risk if rates stay higher for longer. It’s a difficult environment. The key is diversification into assets that aren’t correlated with domestic service inflation. International equities, emerging markets, commodities. Things that benefit from different economic cycles. Luna: So the lesson is: don’t just watch the S&P 500. Watch your own expense sheet. If half your spending is on services, your personal inflation rate is probably higher than the national average. Lucas: That’s the insight. Your wallet has its own CPI. And if you’re spending heavily on housing, healthcare, and insurance, you’re already inside the sticky inflation zone. Understanding that distinction helps you stop blaming yourself for feeling poor when the charts say the economy is fine. The charts are looking at TVs and gas. You’re looking at rent and repairs. Luna: It’s a powerful reframing. Next time someone says inflation is dead, you can ask them which part of their life they’re talking about. Lucas: Exactly. And until the labor market loosens enough to put downward pressure on wages, services will remain expensive. The question isn’t whether inflation will return to two percent tomorrow, but how we adapt to a world where the cost of human interaction remains permanently higher. Luna: A world where time is the scarcest resource. Thanks for helping us unpack that, Lucas. Lucas: Anytime. Let’s see if the markets decide to acknowledge that reality before the end of the quarter.