Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / How World Cup Spending Skewed US Inflation Data
Transcript
- Lucas: So the Fed's latest Beige Book came out last week, and there's this one detail that's been bugging me — the World Cup gave bars and restaurants a real boost in June, but the report also says consumers are starting to flash warning signs. Luna: Right, I saw that. It's almost like two different economies in the same paragraph. The soccer crowds were out spending, but underneath that, the typical consumer is pulling back. Lucas: Exactly. And the scale is worth noting. We're talking about a measurable bump in the services spending data for June. But the Fed's own summary says quote 'consumers are flashing warning signs' — that's a direct quote from the Beige Book. Luna: So how much of the June retail and services strength is just World Cup noise? And how much is real underlying momentum? Lucas: That's the million-dollar question. Look at the data we've got — core CPI is basically flat month over month, down from 336.12 to 336.1. Wholesale prices actually declined 0.3 percent in June, driven by a big drop in gasoline. So the headline inflation picture is cooling. Luna: But the World Cup spending would show up in the services side of PCE, right? That's the Fed's preferred gauge. Lucas: Yes, and PCE for May was already up a bit — 131.5 versus 130.94 in April. June's reading comes out next week, and I suspect we'll see another bump from all those World Cup watch parties. The question is whether the Fed looks through it. Luna: They've been pretty clear they want to see a sustained trend, not a one-off event. But with the unemployment rate dropping to 4.2 percent and jobless claims at 208,000, the labor market is still tight. Lucas: Right, and that's the tension. The Fed cut rates earlier this year because inflation was coming down, but now you've got this weird mix: falling wholesale prices, but rising import prices — especially from China, which hit their highest level since 2008 in June. Luna: So the World Cup is a temporary demand shock, but Chinese import prices are a supply-side cost push. Those are two very different forces for the Fed to weigh. Lucas: Exactly. And on top of that, you've got the proposed tariffs on generic drugs starting in 2028 — that's a future cost pressure that could feed into health care inflation down the line. But for now, the immediate question is: how do you strip out the World Cup effect from the core data? Luna: I think the Atlanta Fed's GDPNow model actually adjusts for some of these one-offs, but it's tricky. The Beige Book is anecdotal, so you can't just subtract a number. Lucas: Right. And here's a quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. If walking through the economy with us has made something click, that's the button that keeps it ad-free. Luna: Yeah, it's a small group that really makes a difference. And we appreciate it. Lucas: So anyway, back to the World Cup distortion — I think the real signal is in the consumer warning signs. The Beige Book mentioned that consumers are trading down, using more credit, and pulling back on discretionary spending outside of events. Luna: That lines up with the credit card data we've seen. Episode 120, I think — consumers tapping plastic again. The savings rate has been declining. Lucas: Yes, and that's the concerning part. The World Cup gave a sugar high to bars and restaurants, but the underlying consumer is stretched. Average hourly earnings are up to $37.60, but that's not keeping pace with the cost of services. Luna: So when the World Cup bump fades, we might see a soft patch in services spending. And that could actually be what the Fed wants — slower demand to keep inflation in check. Lucas: Potentially. But there's also the import price story. If Chinese goods are getting more expensive because of tariffs and supply chain shifts, that's a cost push that could offset any demand slowdown. Luna: And the Fed doesn't control tariffs. That's a fiscal policy tool. So they have to react to whatever inflation comes from that side. Lucas: Right. Kevin Warsh, who's been in the news lately, has been parsing Fed language very carefully. The market is trying to figure out if the next move is another cut or a hold. The ten-year yield has ticked up to 4.66 percent, and the two-year is at 4.41 — that's a pretty flat curve. Luna: The curve un-inverted a while back, but now it's basically flat again. That usually signals uncertainty, not a clear direction. Lucas: Yeah. I think the takeaway for listeners is: don't over-interpret the June data. The World Cup created a real but temporary spike in services spending. Look at the July and August numbers for the real trend. Luna: And watch the import price data, especially from China. If that keeps rising, it could put upward pressure on core goods inflation later this year. Lucas: Exactly. The Fed is in a tough spot — they want to ease because headline inflation is down, but the underlying dynamics are mixed. The World Cup added noise, not signal. Luna: So bottom line: the economy is slowing, but not collapsing. And the World Cup made it look a little better than it actually was. Lucas: I think that's fair. And we'll have a clearer picture after the July CPI and PCE releases. For now, the data says: caution, not panic.