Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Wholesale Price Shock Behind Stagflation
Transcript
- Lucas: If you look at the headline numbers for September, the consumer side looks manageable, but the producer side just threw a wrench in the gears. Wholesale prices jumped six point three percent annually, which is the biggest gain we have seen since twenty twenty-two. Luna: That feels like a lagging indicator or a leading one? Because if those costs are sitting at wholesalers right now, they usually filter down to the shelf within sixty to ninety days. Lucas: Exactly, and that is the terrifying part of this specific cycle. We are seeing upstream cost pushes accelerate while downstream demand is already cracking. Real GDP growth has slowed to two point two percent annualized, so we are not getting the volume growth needed to absorb these higher input costs. Luna: So businesses are eating the margin or passing it on, but with growth slowing, consumers can't pass it on fast enough without dropping sales. Lucas: Right, and look at the core CPI number. It is sitting at three hundred thirty-eight point nine, up from three hundred thirty-seven point seventy-six. That tells me the inflation is not just coming from volatile energy or food prices anymore; it is structural. Luna: It’s becoming embedded in the baseline. If wholesalers are demanding more, retailers have less room to negotiate discounts, which means the sticker price stays high even if the economy is cooling. Lucas: Let's talk about the Fed's position here. Everyone expects them to hold rates in October, but Kevin Warsh is suggesting a surprise hike could be necessary if these PPI trends continue. Luna: A surprise hike sounds painful when unemployment is ticking up to four point two percent. Are they trying to kill the inflation dragon or risk killing the patient? Lucas: They are walking a razor's edge. If they cut too early because nominal GDP looks okay, they let the wholesale shock bake into permanent consumer pricing. But if they hold or hike, they deepen the stagnation. Luna: It feels like the IMF warning about the messy forecasting is spot on. They don't have good models for this kind of simultaneous supply shock and demand softness. Lucas: Let's pause for a second. If walking through the economy with us has made something click, and you want to keep this analysis ad-free and independent, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps us dig into these deeper datasets every week. Thanks for supporting the show. Lucas: Back to the data. The job market is weakening slightly. Initial claims are up to one hundred ninety-nine thousand, and job openings dropped to seven thousand seventy-nine thousand. This is the classic stagflation signal: labor is loosening, but prices aren't falling. Luna: And average hourly earnings are still rising at three dollars an hour, which keeps wage-push inflation alive. Workers need raises to catch up, so companies raise prices to pay them. Lucas: It’s a closed loop. And notice the ten-year breakeven inflation rate. It ticked up to two point thirty-five percent. Markets are starting to price in that this inflation is stickier than the consensus thinks. Luna: That’s a subtle but important shift. Two percent is the target, but two point thirty-five suggests investors are hedging against a period of persistent price growth. Lucas: Let's look at the tech sector reaction. The NASDAQ dropped four point one percent over the last five days. Investors are realizing that high-growth tech relies on cheap capital and strong consumer spending, both of which are under threat here. Luna: Meanwhile, gold is up half a percent. Money is moving into safe havens because the real return on cash is uncertain when inflation is outpacing the federal funds rate. Lucas: This brings us back to the budget deficit. It swelled to almost two trillion dollars for fiscal twenty twenty-six. How does massive government spending interact with this private-sector price squeeze? Luna: It adds liquidity to the system, which can support asset prices, but it doesn't fix the supply bottlenecks causing the wholesale spike. You're printing money but not making more goods. Lucas: Precisely. So we have a fiscal impulse pushing demand up, while supply constraints push prices up, all while real economic output is barely growing. That is the definition of the trap. Luna: And what about the dollar? The Dow is actually up slightly despite the Nasdaq drop. Is there some resilience in industrial or financial stocks that we're missing? Lucas: Maybe, but look at the broader picture. The S&P fifty is down nearly two percent. The rotation isn't just sectoral; it's a repricing of risk. When wholesale costs rise faster than wages, corporate profit margins get crushed. Luna: Which means fewer hires, lower dividends, and eventually layoffs. It’s a slow-motion contraction disguised as stable employment numbers. Lucas: I think the key takeaway for listeners is to watch the spread between wholesale prices and consumer wages. If that gap widens further, we are heading toward a severe margin compression event. Luna: Agreed. It’s not just about whether inflation is high, but whether companies can afford to keep their current prices without cutting jobs. Lucas: One final thought on the geopolitical angle. The Treasury dismissed the IMF debt warning, but with global trade friction increasing, import costs are likely to stay elevated. Luna: So unless we see a massive productivity boom, probably driven by AI adoption finally hitting the bottom line, we are stuck in this high-cost environment. Lucas: AI is the wild card, but right now, it's too expensive to implement for most mid-sized firms. The capex burden is adding to the very inflation problem we're trying to solve. Luna: It’s ironic. The solution becomes part of the problem until the efficiency gains outweigh the initial costs. Lucas: For now, the data says the whip-lash is over, but the hangover is just beginning. We will see if October’s retail sales data confirms this slowdown. Luna: Or if consumers suddenly find a new source of income to keep buying. Either way, the playbook from twenty twenty-four doesn't work anymore. Lucas: Exactly. Adaptation is the only strategy left when the macro variables stop behaving like they did ten years ago. Luna: Here is to hoping the next data print gives us a break rather than another lesson. Lucas: We will be watching. Thanks for listening.