Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Lettuce Prices Crashed While Inflation Lingers
Transcript
- Lucas: So, lettuce. The headline from this week's CPI report wasn't the overall number, it wasn't core inflation—it was that lettuce prices saw a record-setting plunge. 'Nobody wants it,' one wholesaler told CNBC. And honestly, that's a perfect little window into the weirdness of this stagflationary moment. Luna: Wait, a record plunge? How much are we talking? Lucas: The report doesn't break out lettuce specifically in the headline CPI, but the anecdotal data from wholesale markets shows prices collapsing. The trigger is cyclospora—a parasite that's been linked to contaminated lettuce shipments. Consumers got spooked, demand fell off a cliff, and suddenly growers are sitting on product nobody wants. Luna: So it's a demand shock, not a supply glut. That's different from what we usually see in food inflation. Lucas: Exactly. Normally when we talk about food prices, it's supply-driven—bad weather, pests, trade disruptions. Here, the supply is fine, but the demand just vanished overnight. And that's why this is such a useful case study for our broader stagflation conversation. Luna: Because it shows how sticky some prices are while others are super volatile? Lucas: Right. You've got the overall CPI at 332.8 in July, up slightly from 332.57. Core inflation—excluding food and energy—also ticked up. But the fresh produce category is swinging wildly. And that's a reminder that 'inflation' is an average. Behind that average, there are winners and losers, and some items are crashing even as the broader index creeps higher. Luna: So how does a cyclospora scare fit into the stagflation narrative? I mean, is this just a one-off or does it tell us something structural? Lucas: It's partly a one-off, but it also highlights something structural. In a slow-growth economy, consumers have less buffer. When something like this happens, they don't just switch brands—they switch categories. They buy frozen peas instead of fresh lettuce, or they skip the salad altogether. That kind of behavior change is more pronounced when real incomes are stagnant. Luna: And that feeds into the whole 'grocery bill sticky' problem we've talked about before. Lucas: Exactly. The overall grocery index is still elevated, and items like eggs, meat, and processed foods remain high. But the fresh produce aisle is where you see this volatility. It's a reminder that the inflation we're living with isn't uniform. And for the Fed, that's a problem—because they care about the trend, not the noise. Luna: Speaking of the Fed, the 10-year breakeven inflation rate is at 2.27 percent, up from 2.24. That suggests bond investors still expect inflation to hover above the Fed's 2 percent target. How does a lettuce crash play into that? Lucas: It doesn't directly. The breakeven is based on TIPS versus nominal Treasuries, and that's more about broader inflation expectations. But the lettuce episode is a good reminder that headline inflation can be noisy. That's why the Fed focuses on core inflation—which excludes food and energy. And core PCE, their preferred measure, is still running at 2.6 percent year-over-year, if you annualize the latest reading. Luna: So the Fed is probably not going to change course because of lettuce. But does it affect how they communicate? Lucas: It affects how they explain things. They can point to transitory factors—like the lettuce crash—to argue that some price pressures are easing. But the underlying stickiness in services and shelter is what keeps them cautious. And with real GDP growth at 1.5 percent annualized, down from 2.1 percent, you've got that classic stagflation mix: growth slowing, inflation still above target. Luna: And that's the backdrop for everything we talk about on this show. Speaking of which, if walking through the economy with us has made something click, we'd love it if you considered supporting the show. It keeps us ad-free and independent, which matters when we're trying to make sense of numbers like these. Lucas: Yeah, listener support is what keeps this going. You can find us at buy me a coffee dot com slash fexingo. No pressure, but if you've gotten value out of these conversations, it goes a long way. Luna: Now, back to lettuce. So, beyond the scare, is there something about how fresh produce markets are structured that makes them prone to these swings? Lucas: Absolutely. Fresh produce is perishable, so there's no storage buffer. When demand drops, you can't just put it in a warehouse and wait. Growers have to sell at whatever price clears the market, even if that's below cost. That's why you see these dramatic price collapses. In contrast, something like canned goods or frozen items have more pricing power because they can be held. Luna: So the cyclospora scare is a textbook example of price discovery in a perishable market. Lucas: Exactly. And it's not just about the parasite. It's about consumer perception. Once the news breaks, the demand curve shifts left overnight. And that's something that central banks and economists have a hard time modeling—because it's not just about supply and demand, it's about information and trust. Luna: Have we seen similar episodes historically? I'm thinking of the 2008 tomato scare or the peanut butter recall. Lucas: Right, salmonella in tomatoes in 2008 caused a similar demand drop, and prices fell sharply. But what's different now is the broader economic context. In 2008, we were heading into a financial crisis, but the inflation dynamics were different. Today, you have this slow-growth, high-inflation environment where consumers are already stretched. So a shock like this can have outsized effects on behavior. Luna: And that's a good reminder that the 'average' inflation number hides a lot of individual pain and opportunity. Lucas: Which brings us back to the stagflation question. The Fed is trying to bring down inflation without tipping the economy into recession. But when you have these idiosyncratic shocks—whether it's a lettuce scare or a geopolitical event—it makes their job harder. They have to distinguish between noise and signal. Luna: And this week, we also saw wholesale prices flat in July, against expectations for a 0.2 percent increase. That suggests some upstream price pressure is easing. Lucas: Yes, the producer price index coming in flat is a bit of good news. It means input costs for businesses aren't rising as fast, which could eventually translate into slower consumer price increases. But it's not guaranteed—companies might just pocket the margin improvement, especially if they have pricing power. Luna: So the lettuce crash is actually a microcosm of the bigger disinflationary forces at play? Lucas: In some ways, yes. But it's also a reminder that disinflation isn't uniform. You can have some prices falling sharply while others keep climbing. The overall CPI is still above the Fed's target, and the core numbers are sticky. So the lettuce plunge is a nice story, but it's not going to change the policy trajectory. Luna: And with jobless claims ticking up to 209,000, from 200,000 a week earlier, there are signs the labor market is cooling. How does that fit in? Lucas: It's another piece of the stagflation puzzle. The unemployment rate is still low at 4.1 percent, but initial claims are edging up. And the JOLTS report shows job openings declining to 7.36 million. So the labor market is softening, but not collapsing. That gives the Fed some room to be patient, but it's a fine line. Luna: So where does that leave us? Are we heading for a 'soft-ish' landing or a full-blown recession? Lucas: That's the million-dollar question. The bond market seems to be pricing in a slow grind, not a crash. The 10-year breakeven at 2.27 percent suggests inflation expectations are anchored, but above target. And the equity market is mixed—the S&P 500 is up 0.4 percent over the past five days, but the Dow is down 0.5 percent. Investors are trying to figure out which sectors can navigate this environment. Luna: So it's a stock-picker's market, not a rising tide. Lucas: Exactly. And that's why we do these deep dives into specific industries. The macro picture is important, but the real investment opportunities—and risks—are at the micro level. Like lettuce: a seemingly trivial item, but it tells you a lot about consumer psychology, supply chain dynamics, and the limits of central bank policy. Luna: And next week, we'll dig into another corner of the economy that's being reshaped by stagflation. Lucas: But for now, next time you're in the produce aisle and see a ridiculously cheap head of romaine, you'll know exactly what happened. And you'll have a great conversation starter for your next dinner party.