Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Gym Membership Is Beating Core CPI
Transcript
- Lucas: So Luna, I was looking at the June core CPI print again — the headline number dipped to 3.1 percent year over year, but core services, excluding energy and housing, is still running at 3.8 percent. That gap is the story. Luna: Right, and that's not just a stat on a spreadsheet. It's showing up in people's monthly bills. Like, I just got my gym renewal notice and it's up eight percent from last year. Eight percent. Lucas: That's actually the perfect example, because fitness club memberships are one of the categories inside core services that's been climbing faster than the overall index. It's up about 4.6 percent year over year, while core services ex-energy and housing is around 3.8. So your gym is beating the average. Luna: Why is that? I mean, demand for gyms seems pretty stable, it's not like everyone suddenly decided to get fit. Lucas: Well, part of it is that gyms have a ton of pricing power. They're subscription businesses with high switching costs — once you're in, you're likely to stay even if they raise the price by five bucks a month. And there's some evidence that post-pandemic, people are more attached to their fitness routines than ever, so they're less likely to cancel over a modest increase. Luna: Makes sense. And you see that in the data too — membership retention is up, at least for the big chains. But is this just a gym thing, or is it broader? Lucas: It's broader. Look at other subscription-style services — streaming, internet, even some insurance products. They all have that same dynamic: predictable revenue, sticky customers, and the ability to pass on cost increases without losing too many subscribers. That's why core services has been so stubborn. Luna: And that's what's keeping the Fed from cutting rates, right? Even though the headline CPI is cooling, the services side is still hot. Lucas: Exactly. The Fed's preferred gauge, the PCE price index, came in at 2.4 percent year over year for June, down from 2.5 the month before. But core services, ex-housing, is still running above 3 percent. So the Fed's in a bind — they see progress, but not enough to justify easing yet. Luna: And you mentioned that this is a subscription story. But is there a structural reason why services inflation is stickier than goods? I mean, goods can be imported, so we've seen those prices fall because of cheaper imports from China and other places. Services are more local, so they're more sensitive to wage costs. Lucas: That's exactly it. Services are labor-intensive, and wages have been rising — not as fast as they were, but still around 4 percent year over year. And when labor costs go up, services providers pass that on. You can't offshore a haircut or a gym membership. So that's why services have been the sticky part of the inflation picture. Luna: But wait, we've seen some services prices actually fall, like car rentals and hotel rooms, at least in some cities. So it's not uniform. Lucas: No, it's not. There's a lot of dispersion. But the key insight is that the categories that are falling are the ones that are more discretionary or have more competition. Gyms, on the other hand, have consolidated a lot — the big players like Planet Fitness and LA Fitness have been buying up smaller competitors, which gives them more pricing power. Luna: I didn't think about the consolidation angle. So that's another factor — market concentration. And that also ties into why your internet bill keeps rising, which we did an episode on a while back. Lucas: Right, same story there. So, for anyone listening, the takeaway is: if you want to understand where inflation is headed, don't just look at the headline CPI. Look at core services ex-shelter. That's the real beast. Luna: And maybe negotiate your gym membership. We're not financial advisors, but it doesn't hurt to ask for a discount. Lucas: Ha, that's a good point. And speaking of asking for support, we want to keep this show free and ad-free, and that's only possible because some listeners chip in. If you've gotten value from these conversations, you can support us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the show independent. Luna: Yeah, we really appreciate anyone who does that. Now, back to the gyms — I was reading that Planet Fitness actually raised its annual fee last month, and they said it was to 'enhance the member experience.' Lucas: Classic corporate speak, right? But the interesting thing is that they didn't see a big cancellation uptick. And that's exactly the kind of pricing power we're talking about. They know that the average member just grumbles and pays the extra twenty bucks a year. Luna: So it's almost like a behavioral lock-in. People feel guilty if they cancel because they think they'll lose their fitness momentum. Gyms exploit that. Lucas: Absolutely. And that's not unique to gyms — it's the same psychological mechanism that makes it hard to cancel streaming services. So when we talk about services inflation, we're really talking about a battle between consumer inertia and corporate pricing power. Luna: And that battle is more intense right now because of wage growth. Even though the job market has cooled a bit, wages are still rising enough to support these price increases. The ADP report for July showed private payrolls up only 44,000, which is a slowdown, but the wage data within it still showed a 4.8 percent year-over-year gain for job stayers. Lucas: Yeah, that wage stickiness is the crux. As long as wages keep growing at that pace, services inflation is going to remain stubborn. And the Fed knows that. That's why they're not rushing to cut rates, even with the bond market pricing in some easing later this year. Luna: But if the Fed stays on hold, does that risk a recession? I mean, the yield curve has been inverted for a while now, though it's un-inverted lately. Lucas: It's a tricky balance. The Fed's new chair, Warsh, has been pretty hawkish. He's made it clear he wants to see more evidence that services inflation is durably coming down before he'll support cuts. And the manufacturing survey we saw this week showed that inflation worries among manufacturers are worse than pandemic-era levels, mostly because of tariff costs. So there are crosscurrents. Luna: Interesting. So on one hand, you have goods prices falling because of lower input costs and import prices, but on the other hand, services are holding up because of wages. That's the split we keep coming back to. Lucas: Right. And that's why this episode is really about that split. It's not that inflation is dead, it's that it's rotated. It's now concentrated in the services you can't avoid — your gym, your insurance, your internet bill. The stuff that used to be cheap is now the stuff that's going up faster. Luna: So for the average person, what's the actionable advice? Besides asking for a discount. Lucas: Well, the biggest one is to scrutinize any subscription you have — whether it's a gym, streaming, or even your phone plan. Look at what you're actually using and don't be afraid to cancel and renegotiate. Because these companies bet on you not noticing the slow creep. And also, if you're planning a budget, expect your services line to increase faster than your goods line. Luna: That's a good point. I actually renegotiated my internet bill last week just by calling and asking for a retention offer. They gave me a discount for a year. So it's possible. Lucas: Exactly. And that's a great example of how consumers can fight back against pricing power. But the bigger picture is that this is a structural change. Services are a growing share of the economy, so services inflation is going to matter more for the overall inflation outlook. Luna: So when we think about the next few months, what should we watch? Is it going to be wage data? Or something else? Lucas: I'd say watch two things. First, the Fed's preferred inflation gauge, the PCE, which we already talked about. Second, watch what's happening with job-switcher wages, because if people start seeing bigger raises when they switch jobs, that could reignite pressure. The data so far shows that job stayers are getting decent raises, but switchers are getting smaller ones than they were a year ago. If that flips, services inflation could get even stickier. Luna: And of course, we'll be here to break it all down for you. But it's interesting to think that your gym membership is actually a leading indicator for the whole economy. Lucas: Ha, that's a fun way to put it. But it's not far off. So next time you pay your gym bill, you'll know exactly what it's telling you about the state of inflation.