Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Rent Seeking Fuels Modern Stagflation
Transcript
- Lucas: Look at the numbers for August 2026, specifically that core CPI reading of 337.8. It is stubbornly high, but what is more interesting is that real GDP growth has slowed to just 2.20 percent annualized. We are seeing a classic stagflationary setup where prices aren't falling off a cliff, but the economy isn't growing either. Luna: Right, and if you look at the job market, with unemployment ticking up to 4.20 percent and job openings dropping below 7.1 million, the labor side isn't driving wages up enough to justify those price hikes anymore. Lucas: Exactly. So we have to ask, who is keeping these prices elevated? It isn't just supply chain shocks or energy costs anymore. I think we are looking at a structural shift where companies with market power are simply choosing to keep prices high because they can, regardless of demand. Luna: You mean rent-seeking? Where firms use their dominant position to extract more value without actually creating more efficiency? Lucas: Precisely. And the weird thing is, most people blame sticky services inflation or wage pressures. But if you dig into the sectoral data, you see industries where productivity hasn't moved much, yet profit margins have expanded significantly. That is a clear signal of pricing power overriding competitive pressure. Luna: It feels like we are seeing this in healthcare and software especially, where consolidation means consumers have fewer alternatives, so they just pay the higher price. Lucas: That is a great example. In healthcare, for instance, you have hospital systems merging across regions, reducing local competition. When there is only one provider left in a county, they don't need to compete on price. They just raise rates, and insurance premiums go up, feeding back into the broader CPI number. Luna: But doesn't that usually get checked by regulation or antitrust action? The SEC and DOJ have been talking about enforcement lately. Lucas: They talk about it, but the enforcement lag is years long. By the time a merger is blocked or a fine is levied, the market structure has already calcified. Plus, with the current political climate focusing on other issues, the regulatory appetite for disrupting these entrenched players is low. Luna: So we are left with an economy where the big guys just quietly raise prices while everyone else struggles with the cost of living. Lucas: And here is the kicker: if they stopped raising prices, would the economy suddenly boom? Probably not, because the underlying demand is soft. But at least the burden wouldn't be shifting disproportionately onto households through higher costs for essentials. Luna: It reminds me of that CNBC headline from last week about Americans' debt problems flashing warnings not seen since the Great Recession. If corporations are extracting more rent, households have less disposable income, so they borrow more to maintain consumption. Lucas: Yes, and that debt fuel is running out. Credit card delinquencies are creeping up. So we have a situation where corporate balance sheets are strong, but household balance sheets are strained. That is a recipe for prolonged stagnation, not a sharp recession. Luna: Which makes the Federal Reserve's job incredibly difficult. If they cut rates to help households, they might give cover for companies to keep prices high. If they hold rates, they crush the borrowers. Lucas: Right. And notice how the ten-year breakeven inflation has ticked down slightly to 2.33 percent. The market thinks inflation will moderate, but maybe not because companies are being fair, but because demand destruction is finally starting to bite. Luna: Or maybe because the cost of borrowing is making it harder for them to expand, so they just squeeze existing customers instead. Lucas: I think we need to acknowledge that this isn't just a macroeconomic phenomenon; it is a behavioral one. Managers know they have the power, so they exercise it. It is rational for the individual firm, even if it is irrational for the aggregate economy. Luna: So the solution isn't just monetary policy. It requires structural changes, like breaking up monopolies or reducing barriers to entry for new competitors. Lucas: Agreed. And until we see that, we are going to keep seeing this slow-growth, high-price environment. The data from August supports that view clearly. Luna: Before we dive deeper into how this impacts your own budget, remember that walking through the economy with us has made something click for a lot of listeners. A couple of dollars a month is genuinely what keeps these going, so check out buy me a coffee dot com slash fexingo if you've gotten something out of the show. Lucas: Thanks for supporting independent research. Now, let's look at the technology sector, which is supposed to be the driver of future growth, but is showing similar signs of rent-seeking behavior. Luna: Yeah, tech giants raising subscription fees across the board while claiming AI is driving value, even when the user experience hasn't changed much. Lucas: Exactly. Cloud computing providers, for example, have raised prices significantly over the last two years. Even as compute costs should theoretically drop due to efficiency gains, they are passing on more costs to enterprise clients. Luna: Because switching costs are too high. Once you are locked into an ecosystem, you don't leave unless forced to. Lucas: That lock-in effect is the ultimate form of rent-seeking. It creates a captive audience that pays a premium for convenience and integration, rather than competing on price. Luna: And this is happening across almost every major industry now, from airlines to streaming services. The era of competition-driven price drops seems to be over. Lucas: It seems like we are entering a new phase where stability and extraction are prioritized over innovation and disruption. Investors are rewarding companies that can maintain these margins, even if they aren't growing revenue fast. Luna: So the S&P 500 hitting 7,800 isn't necessarily a sign of a booming economy, but a sign that these powerful firms are squeezing more out of a stagnant pie. Lucas: That is a very sharp way to put it. And it explains why the VIX remains relatively calm compared to previous periods of stress. The market knows the big players are protected. Luna: But what happens when the consumers finally break? When credit cards max out and they stop paying for subscriptions? Lucas: Then we might see a sudden correction in those profit margins. Companies can't raise prices forever if no one buys. But until that point, we are stuck in this limbo. Luna: It makes me wonder if small businesses are getting crushed in the middle, unable to match the scale of the big players but facing the same input cost increases. Lucas: Absolutely. Small businesses lack the pricing power to raise rates easily, so their margins get compressed. They are the canaries in the coal mine for this model. Luna: So the RUT underperforming the S&P is another symptom of this rent-seeking dynamic favoring large caps. Lucas: Yes, and that divergence is likely to widen until there is a fundamental reset in how value is distributed in the economy. Luna: Do you think the government will step in with subsidies or price controls to help the small players? Lucas: Unlikely. The current administration is focused on fiscal constraints and debt management, not industrial policy for small business competitiveness. Luna: So we are on our own to navigate this landscape, looking for ways to protect our purchasing power against these corporate strategies. Lucas: Exactly. And understanding this dynamic is the first step. You can't fight what you don't recognize. Rent-seeking is subtle, but its effects are everywhere. Luna: It definitely changes how you view those quarterly earnings reports, looking past the top-line growth to see where the real pressure points are. Lucas: Right. And for investors, it means being wary of companies that rely solely on price hikes for growth, rather than volume expansion or innovation. Luna: Those are the ones that will eventually face the backlash when the consumer wallet truly snaps shut. Lucas: We will have to see if the next few months bring any relief or if this becomes the new normal for the American economy. Luna: Either way, staying informed and critical of these trends is the best defense we have against being priced out of our own lives.