Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Hidden Cost of Cheap Lettuce
Transcript
- Lucas: So, lettuce. The head of iceberg lettuce that cost you two bucks last month might be ninety-nine cents today. And that sounds like a win for your wallet, but the story behind that price drop is a lot more complicated than cheap salads. Luna: I saw the headline about lettuce prices hitting a record plunge. But my first thought was, wait, didn't we just talk about inflation being sticky? How does that square with a crash in food prices? Lucas: Exactly, and that's the puzzle. The July CPI report, which came out this week, showed headline inflation cooling to something like two and a half percent — but the core number, which strips out food and energy, is still running above three. So the food component is actually dragging the headline down. And within food, produce is the wild card. Luna: So lettuce is the weird outlier that's making inflation look better than it actually feels in the grocery aisle. Lucas: Right. And the reason it's so extreme right now — we're talking about a complete collapse in wholesale lettuce prices — is a double whammy of supply and demand. On the supply side, you've got a bumper harvest in California's Salinas Valley. Perfect growing weather, yields are up. On the demand side, there was a cyclospora outbreak linked to some bagged salads back in June, and consumers are spooked. Nobody wants to buy lettuce. Luna: A food safety scare on top of a glut. That's a recipe for a price crash. Lucas: And the data is stark. Wholesale prices for lettuce have fallen something like fifty percent in a matter of weeks. The headline in the Wall Street Journal was literally 'Nobody wants it.' That's the kind of thing that doesn't show up in the average inflation numbers because food is so volatile, but it tells you a lot about how fragile fresh food markets are. Luna: So when the CPI report says food prices are down, is that just lettuce, or is it broader? Lucas: It's mostly produce, and specifically leafy greens. You're seeing some softening in other fresh vegetables too, but the lettuce crash is the big one. The CPI for fruits and vegetables was down maybe one point two percent in July, and that's largely this. But here's the thing — that's not a sign of healthy deflation. That's a supply chain whiplash. Luna: Whiplash. I like that. Because if you're a farmer, this is a disaster — your revenue just evaporated. Lucas: It's brutal. And it's exactly why the Fed doesn't target food prices. They look at core inflation, which strips out food and energy, precisely because these things are so volatile. But that doesn't mean the Fed ignores food entirely. A sustained drop in food prices can feed into inflation expectations, and if consumers see their grocery bill shrinking, that can actually help the Fed's fight. Luna: But in practice, that's not what's happening, right? Because the core is still sticky. So the Fed is stuck with a headline that looks good but a core that won't budge. Lucas: Exactly. And that's the puzzle the Fed is wrestling with right now. The latest Fed funds rate is at three point six three percent, and they've been on hold for months. The bond market is pricing in a cut in September, but the Fed's own dot plot suggests they want more evidence that core inflation is sustainably heading toward two percent. And a lettuce crash isn't that evidence. Luna: So what would be? What data would actually move the needle? Lucas: It's the services side. Shelter costs, health care, insurance — the things that are still running hot at three and a half to four percent. Those are the areas the Fed is watching. And here's the thing: the CPI report this week showed some progress on shelter, finally. Housing costs are starting to decelerate, but it's slow. And that's what matters, not the lettuce. Luna: So the lettuce crash is basically a distraction from the real story. But it does tell us something about the nature of food supply chains and how vulnerable they are. Lucas: That's the deeper angle I want to get into. A single outbreak, a single bad weather event, and prices can swing fifty percent in either direction. That's not normal for most goods. But for fresh produce, it's par for the course. And that volatility has real economic consequences beyond the grocery store. Luna: Like what? Who's actually bearing the cost of this? Lucas: Well, think about the farmer. They planted based on expectations of a certain price. They get blindsided by a food safety scare — through no fault of their own — and suddenly they're selling below cost. That can push smaller farms out of business. And then you get consolidation in the industry, which over time makes the supply chain more fragile, not less. Luna: So the cheap lettuce today could mean more expensive, less varied lettuce later. Lucas: Exactly. And there's a parallel in the broader economy. We've seen this pattern in other industries — the pandemic showed us what happens when supply chains are too lean, too just-in-time. The produce market is just an extreme example of that, on a weekly cycle. Luna: It's like a stress test for the supply chain, and it's failing in slow motion. Lucas: Right. And while we're on the subject of stress tests, this is a good moment to mention something about this show. We deliberately don't run ads. No sponsors, no interruptions. That's a choice we made because we want these conversations to feel like you're just sitting in on a couple of people who actually give a damn about the numbers. If you've found yourself understanding the economy a little better because of this show, and you want to help keep it that way, the support link is buy me a coffee dot com slash fexingo. No pressure, just a low-key way to keep the lights on. Luna: And it genuinely makes a difference. Every little bit goes into research, editing, the whole thing. But we're not going to beg. Back to the lettuce. Lucas: Back to the lettuce. So we've got this whiplash, and the question is, what does it mean for the inflation narrative? On one hand, you have the CPI report showing headline at two point five percent, which is the lowest in years. On the other hand, core is at three point two, and services are still sticky. The bond market is looking at that and saying, okay, the Fed can cut in September. The ten-year Treasury yield is at four point six four, and the two-year is at four point three two — a steepening curve, which is typical when a cut is expected. Luna: So the market is already pricing in the cut, which means the Fed almost has to deliver, right? Lucas: It's not that simple. The Fed doesn't want to be boxed in. And they've been saying all along that they need to see sustained progress on core inflation. The problem is, the core number has been stuck in this three to three and a half range for months. The only reason headline is cooling is because of food and energy, and those are exactly the things the Fed doesn't target. Luna: So the Fed is in a bind. The market wants a cut, the data is mixed, and the credibility of the two percent target is on the line. Lucas: And that's the real story. It's not about lettuce, it's about the Fed's credibility. If they cut too soon and inflation reaccelerates, they lose all the ground they've gained. If they wait too long, they risk a recession. Right now, the unemployment rate is four point one percent, which is actually down a tick from four point two. So the labor market is holding up. But job openings are declining — down to seven point three million from seven point five million. That's a sign of cooling, but not collapse. Luna: So the Fed has some room to wait, but the market is impatient. Lucas: And that's the challenge. The market is always looking for the next move, and the Fed wants to be data-dependent. But the data is giving mixed signals. You've got wholesale prices flat in July, below expectations — that's a positive. But you've got a budget deficit surging to its highest level since March 2021, which is not a positive. And you've got these global risks, like the Iran war threatening an economy that was the G7's fastest-growing. Luna: So there's a lot going on. And the lettuce crash is just one piece of a very complicated puzzle. Lucas: Exactly. But what I find interesting about the lettuce story is how it illustrates the disconnect between the headline numbers and the real economy. You can have a record plunge in lettuce prices and still have inflation that feels high to most people. Because the stuff that's going up — rent, insurance, healthcare — that's the stuff that eats your paycheck. Lettuce is a rounding error. Luna: Unless you're the farmer. For them, it's not a rounding error. Lucas: No, it's not. And that's the human side of this data. Behind every CPI line item, there's a supply chain and a family business. And when we talk about inflation as a macro concept, it's easy to forget that. But the Fed doesn't forget it. They know that a sustained drop in food prices can be deflationary, but they also know it's temporary. So they look through it. Luna: So the next time you see a headline about lettuce prices crashing, you'll know it's not the whole story. Lucas: Right. And, you know, maybe it's a reminder that the economy is a living, breathing thing — not just a set of charts on a screen. The Fed is trying to steer this thing, but there are a lot of moving parts, and some of them are growing in a field in California. Luna: And that's a nice way to leave it. Thanks for joining us on The Macro Memo. Lucas: Until next time, keep an eye on the core.