Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Lettuce Prices Are Crashing While Inflation Sticks
Transcript
- Lucas: So today's CPI report had a few headline numbers, but there's one data point that jumped out at me more than any other. Lettuce prices fell at a record pace in July. Luna: Record plunge? I saw the headline about cyclospora spooking consumers, but I didn't realize it was that dramatic. Lucas: Yeah, it's wild. The produce aisle basically became a no-go zone after that outbreak. And it's a perfect example of how a single health scare can distort the inflation numbers the Fed actually watches. Luna: Before we dig into that, I want to mention something. We keep this show completely ad-free, and that's a choice we've made because we think the macro picture is confusing enough without sponsor noise. If you've gotten something out of these daily conversations, supporting us is easy. The link is buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep this going, and we appreciate it. Now, back to the lettuce. Lucas: So the overall CPI rose just 0.1 percent in July, putting the annual rate at 3.4 percent. That's in line with expectations, but the internals tell a more interesting story. Luna: Right, because food and energy are always volatile. What did core inflation do? Lucas: Core CPI, which strips out food and energy, actually ticked up. It's now running at an annual pace that's still above the Fed's comfort zone. And that's the part that should keep policymakers on edge. Luna: So the headline looks cool, but underneath, the sticky stuff is still sticky. Lucas: Exactly. And the lettuce plunge is a great example of why we have to look past the headline. A cyclospora scare is a temporary shock, not a signal of deflation. Luna: But it does make you wonder, how much of the recent cooling in inflation is just these one-off twists? Lucas: That's the million-dollar question. The Fed has been saying they need to see sustained progress, and the July report is another mixed bag. Core is running at a pace that's still too high for comfort. Lucas: And look at the ten-year breakeven rate, which is a market-based measure of inflation expectations. It's at 2.27 percent, down slightly from 2.29. That's actually a sign that long-term expectations are anchored, despite the noise. Luna: So the market isn't panicking about lettuce prices, but what about the Fed's next move? The effective fed funds rate is at 3.63 percent, and they've been on hold for a while. Lucas: Right, and today's numbers probably don't change that calculus. The Fed wants to see core inflation cool more convincingly, and we're not there yet. Luna: But jobless claims ticked up to 199,000, and the unemployment rate dipped to 4.1 percent. That's a mixed labor market signal too. Lucas: Yeah, the labor market is still tight by historical standards, but there are some cracks forming. Job openings have been drifting down, and the pace of hiring has slowed. Lucas: The thing is, the Fed is in a tough spot. They want to avoid a recession, but they also can't let inflation re-accelerate. So they're waiting for more data. Luna: And in the meantime, produce prices are doing their own thing. Is there any sign that the lettuce plunge is spreading to other food items? Lucas: Not really. In fact, overall food prices were fairly stable in July. It's really a lettuce-specific story. Lucas: But it's a useful reminder that the CPI is a noisy gauge. When you see a headline number move, it's worth asking what's driving it and whether it's durable. Luna: So if the Fed is looking at core inflation and the labor market, what are they likely to do at the next meeting? Lucas: They're on hold, and I think they stay on hold. The minutes from the last FOMC meeting stressed patience, and nothing in this report is likely to force their hand. Luna: But doesn't the recent slowdown in GDP growth to 1.5 percent annualized give them some cover to cut? Lucas: It does, but inflation is still above target, and the Fed has been burned before by declaring victory too early. They'd rather be patient. Lucas: And then you have the AI build-out complicating things. There's a great headline today about how all that spending on data centers is actually adding to inflationary pressure. Luna: How so? Lucas: Well, construction costs, electricity demand, and the competition for skilled workers are all rising. That's a different kind of inflation than we saw in 2021, but it's still inflation. Luna: So even as lettuce prices crash, the AI boom is keeping the Fed's job hard. Lucas: Exactly. And that's the kind of structural pressure that isn't going to fade in a month or two. It's a longer-term issue. Luna: So what should listeners take away from today's CPI report? Lucas: I'd say, don't overreact to the headline. The 3.4 percent annual rate is still too high, but the details matter. Core inflation is running at a pace that the Fed can't ignore, but there are also these temporary shocks like lettuce that muddy the picture. Lucas: And for the Fed, it's another data point that says, we can wait. We don't have to rush to cut rates, and we don't have to tighten further. Just sit tight and watch. Luna: So patience is the theme, even when the produce aisle is in chaos. Lucas: Exactly. And as always, we'll keep watching the data. The next big test is the July jobs report, which came in a bit soft, but we'll see if that trend continues. Luna: And maybe by then, we'll know if cyclospora is a one-time thing or a recurring guest on the inflation stage. Lucas: That's the hope. For now, we're just watching the numbers, one salad at a time.