Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Housing Costs Lock In Stagflation
Transcript
- Lucas: The economy feels stuck in a very specific kind of gravity right now. We have nominal GDP creeping up, but real growth has flattened to one point five percent annualized. Meanwhile, the consumer outlook plunged in September as people realize their inflation expectations aren't cooling down. Luna: It’s that disconnect between headline inflation and the things we actually pay for every month. Shelter costs are still the anchor dragging everything down. Lucas: Exactly. And the data from August shows Core CPI sitting at 337.8, barely moving off its plateau. The Federal Reserve is staring at a ten-year breakeven inflation rate of two point four percent, which suggests the market thinks the central bank will lose control again if they blink. Luna: But isn't shelter data notoriously lagged? I feel like by the time the official number drops, the actual rent hikes have already happened or even softened. Lucas: That’s the trap. The Bureau of Labor Statistics uses a lagging methodology for shelter, meaning today’s high inflation print is largely reflecting leases signed six months ago when rents were still surging. So even if new listings soften today, the CPI won't see it for quarters. Luna: So the Fed is tightening based on yesterday's problems while ignoring today's reality. Lucas: Precisely. And that mismatch is why we’re seeing this stagflationary echo. Real wages are struggling. Average hourly earnings are at thirty-seven dollars, which sounds okay until you subtract the persistent inflation in services and housing. Luna: Right, and if you're earning thirty-seven bucks an hour but your rent went up eight percent last year, you're not saving anything. Lucas: You're surviving. And that survival mode is exactly what breaks the productivity cycle. When households are focused on keeping a roof over their heads, they cut back on discretionary spending, which slows economic activity without lowering prices fast enough. Luna: It creates this vicious cycle where low growth meets sticky inflation. Does anyone else think the Fed is underestimating the political risk of hiking rates now? Lucas: They know the risk. But look at the job openings data. JOLTS showed seven thousand two hundred seventy-one openings in July, up slightly from previous months. The labor market isn't collapsing yet, so the Fed feels safe to keep pressure on. Luna: But initial claims are down to two hundred six thousand. That’s pretty tight. They might be mistaking resilience for strength. Lucas: Possible. But let's talk about the mechanism here. Why hasn't the usual cooling in goods prices pulled overall inflation down more aggressively? Because the service sector, led by housing, is structurally constrained. Luna: Supply constraints. You can't build apartments overnight. Lucas: Exactly. Zoning laws, construction labor shortages, and financing costs have all conspired to keep housing supply tight. Even with higher mortgage rates deterring some buyers, renters are flooding into the rental market, pushing up rents further. Luna: So the Fed raises rates to cool demand, but that just makes renting more attractive compared to buying, keeping rental prices high. Lucas: That is a brutal feedback loop. Higher rates don't fix the housing shortage; they just shift the burden from potential homebuyers to renters who have no choice. Luna: It feels like we're trading one problem for another. What happens to the middle class in this environment? Lucas: They get squeezed. Look at the S&P 500 dropping zero point eight percent over the last five days. Corporate earnings are under pressure because consumers are pulling back. But the worst part is the uncertainty. Luna: Uncertainty kills investment. Businesses won't expand if they don't know what interest rates or input costs will look like in six months. Lucas: Spot on. And that hesitation feeds into the slow growth part of stagflation. We aren't getting the boom times that usually help wash away inflationary pressures. Luna: I mean, if you're listening and you're trying to budget for the next quarter, what’s the practical takeaway? Ignore the headlines and focus on fixed costs? Lucas: Fix your biggest liabilities first. If you can refinance debt or lock in a lease before rates climb further, do it. The data suggests volatility is coming, especially with the Fed likely hinting at another hike next week. Luna: And avoid variable-rate products if you can. Cash flow protection is key when growth is stagnant. Lucas: Right. Now, if walking through the economy with us has made something click, we rely on listener support to keep this ad-free. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: It really helps us dig deeper into these reports instead of skimming the surface. Thanks for keeping the lights on. Lucas: Back to the structural issue. We’ve established that housing is the sticky element. But what about the broader implication for asset allocation? Gold is hovering around four thousand three hundred ninety dollars. Luna: Gold usually does well in stagflation because it’s a hedge against both currency debasement and real asset scarcity. It’s essentially insurance. Lucas: Insurance against what? Against the Fed making a mistake. If they hike too late, inflation runs hot, and cash loses value. If they hike too early, they crash the economy, and stocks tank. Gold sits in the middle. Luna: It’s the only asset that doesn’t have a counterparty risk. No CEO to fire, no government to default. Lucas: True. But it doesn't produce income. In a high-interest-rate environment, bonds become attractive again. Yet, with yields volatile, investors are confused about where to park capital. Luna: Maybe that’s why the VIX is ticking up. Fear of the unknown is pricing itself into the markets right now. Lucas: It’s a classic standoff. Investors want growth, but they’re terrified of inflation. And until the housing component of CPI starts to turn decisively downward, that fear won't dissipate. Luna: So we wait for the lag to catch up. It’s frustratingly slow. Lucas: Patience is the hardest virtue in finance, especially now. One thing though—look at the PCE price index. It’s at 131.7. The Fed prefers PCE over CPI. Luna: Because PCE includes more of what people actually consume, like healthcare and relative price changes. It’s a softer measure. Lucas: Correct. And since Core PCE is at 130.7, it’s slightly lower than Core CPI. This gives the Fed a tiny bit of wiggle room to argue that inflation is manageable, even if the headline numbers look ugly. Luna: Wiggle room is nice, but it doesn't pay the mortgage. The lived experience is still painful. Lucas: Absolutely. The gap between macro stats and micro reality is widening. And that’s dangerous for social cohesion, let alone economic stability. Luna: Do you think we’ll see a correction in the labor market before inflation truly breaks? Lucas: I think unemployment will tick up slightly from its current 4.1 percent. The nonfarm payrolls are strong, but the quality of jobs matters less than the volume eventually. If hiring freezes start, wage growth stalls, and demand collapses. Luna: A hard landing then, disguised as a soft one? Lucas: Or a prolonged period of mediocrity. Where growth is flat, inflation is moderate, and everyone feels a bit poorer than they did three years ago. Luna: That sounds like the definition of the era we’re living in. Just enduring it together. Lucas: One step at a time. Keep an eye on those shelter costs. Once they crack, everything else follows. Luna: Until then, we watch the data and adjust our sails. Thanks for the clear picture, Lucas. Lucas: Anytime, Luna. Let’s see where the numbers take us next week.