Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping Consumer Behavior
Transcript
- Lucas: So there's a story running under the radar of the gold sell-off and the bond vigilante narrative, and it's about how Americans are actually changing their spending habits in a lasting way. Luna: You mean the 'trading down' phenomenon we've been hearing about in earnings calls? Lucas: Exactly. But it's not just trading down from a Starbucks latte to a home-brewed coffee. I'm talking about structural shifts — households rethinking what they consider essential, even in upper middle income brackets. Luna: That sounds like a big deal if it's sustained. What's the data showing you? Lucas: Well, we got the April CPI print a few weeks ago. Headline CPI hit 332.4, up from 330.29 in March. Core CPI — which strips out food and energy — hit 335.4, up from 334.17. That's still a monthly increase that's running above the Fed's comfort zone. But more importantly, the ten-year breakeven inflation rate has actually ticked down to 2.44 percent from 2.49 percent a week earlier. Luna: So markets are pricing in slightly lower long-term inflation expectations, but consumers still feel the pinch at the register. Lucas: Exactly. And that divergence is key. The bond market might be sniffing some disinflation, but real people are still seeing prices rise month after month. The University of Michigan consumer sentiment survey, which we'll get an update on later this week, has been stuck near historic lows. And we're seeing that translate into behavior. Luna: Give me a concrete example of this structural shift. Lucas: Look at Walmart's latest quarter. They reported same-store sales growth of around 4 percent, but the interesting part was that their higher-income demographic — households earning over $100,000 a year — accounted for the bulk of that growth. Those shoppers are trading down from Target or from specialty grocers. They're buying private-label brands, which now make up a record share of Walmart's shelf space. Luna: So it's not just lower-income households feeling the squeeze. The affluent are changing behavior too. Lucas: Right. And when that happens, it tends to stick. Once you develop a habit of buying Great Value peanut butter instead of Jif, you don't necessarily switch back when prices stabilize. That's the kind of demand destruction that makes stagflation self-reinforcing. Luna: But average hourly earnings did tick up to $37.40 from $37.35 in the latest data. Wage growth is still positive, albeit slow. Doesn't that help offset some of the pain? Lucas: It does, but real wage growth over the past three years is still negative when you account for cumulative inflation. The typical worker's purchasing power is down maybe 2 to 3 percent since early 2021. And we're seeing that in savings rates. The personal saving rate has fallen below 3.5 percent, which is near the lows we saw in the mid-2000s. Luna: So people are dipping into savings to maintain their standard of living, and that's not sustainable. Lucas: Correct. And that's where the real economic risk lies. If consumers start pulling back on discretionary spending broadly, you get a negative feedback loop. Lower demand leads to slower hiring, which leads to lower wage growth, which leads to even less spending. And that's the stagflation trap. Luna: But real GDP growth annualized came in at 2.0 percent for the first quarter, which is actually up from 0.5 percent in the prior quarter. So the economy is still growing, just not at a breakneck pace. Lucas: That's true. But 2 percent real growth in a high-inflation environment means nominal GDP growth is running around 5 to 6 percent, which is actually below what you'd expect from a healthy expansion. Typically, nominal GDP growth of 4 to 5 percent is accompanied by inflation around 2 percent. Here, we have inflation above 3 percent and real growth at 2. That's the definition of stagflation lite. Luna: And the labor market? Unemployment is still at 4.3 percent, which is historically low. Nonfarm payrolls added about 115,000 jobs in April. So the job market isn't collapsing. Lucas: No, it's not collapsing. But look at JOLTS data — job openings fell to 6.866 million in March, down from 6.922 million. That's a decline. The hiring rate has softened. And initial jobless claims just came in at 209,000, which is low, but the trend is edging up from the mid-190,000s we saw late last year. The labor market is cooling, just slowly. Luna: So consumers are seeing slower hiring, higher prices, and stagnant real wages. That combination is what's driving the behavioral shift. Lucas: Exactly. And I think what's different this time versus the 1970s is that consumers have access to much more information and price comparison tools. So the trading down happens faster. Retailers like Costco are also seeing members switch to cheaper cuts of meat, buying more Kirkland Signature items. That's a canary in the coal mine for the broader economy. Luna: You mentioned the 1970s. Is there a specific parallel you'd draw? Because a lot of analysts are saying this is a mild version at best. Lucas: I'd agree it's milder. In the 1970s, inflation peaked above 12 percent and unemployment hit 9 percent. Today we're far from that. But the structural shifts in consumer behavior that happened in the 70s — like the rise of discount retail, the shift to smaller cars, the decline of brand loyalty — those changes persisted long after inflation came down. I think we're in a similar moment. Luna: So even if inflation moderates, the way people spend might be permanently altered. Lucas: Yes. And that has huge implications for certain sectors. Consumer discretionary stocks, for example, could face headwinds even if the macro environment improves. Companies that rely on premium pricing — think Nike, Lululemon, or even Apple with its high-priced iPhones — may struggle if consumers become more value-conscious. Luna: But Apple just reported decent iPhone sales, didn't they? I saw headline numbers were strong. Lucas: They did, but the mix is shifting toward the lower-priced iPhone SE models, and services revenue is growing faster than hardware. That's a sign of trading down even in the tech space. Customers are holding onto their phones longer, too. The upgrade cycle is lengthening. Luna: Interesting. So the question becomes: what can policy do about this? The Fed is about to get a new chair, Kevin Warsh, sworn in this Friday. He's seen as a hawk. Do rate hikes address this kind of behavioral shift? Lucas: I think rate hikes can cool demand, but they can't reverse the psychological reset that consumers have undergone. If people have internalized that inflation is here to stay, they will continue to trade down and save less. And that creates a structural drag on growth. The Fed's tools are blunt. Luna: So you're saying the stagflation narrative isn't just about inflation and growth numbers; it's about the lasting scars on consumer psychology. Lucas: Precisely. And that's what makes this episode different from the gold sell-off or the bond vigilante stories. Those are market reactions. This is about the real economy — the millions of individual decisions that add up to a slowdown. And those decisions are already being made. Luna: Do you see any sector that's actually benefiting from this shift? I mean, discount retailers, private-label manufacturers, maybe some dollar stores? Lucas: Absolutely. Walmart, as we mentioned, is a winner. Dollar General and Dollar Tree are seeing traffic increases. Even some fast-food chains like McDonald's are benefiting as people trade down from casual dining. But the broader picture is that consumer spending, which makes up about 68 percent of GDP, is losing momentum. That's a concern for the second half of 2026. Luna: And with Kevin Warsh taking over, do you expect any policy changes that might address this consumer behavior directly? Lucas: Unlikely. The Fed's mandate is price stability and maximum employment. They can't make consumers feel richer or more confident. Fiscal policy could help — tax cuts or direct transfers — but with the deficit already high, there's limited appetite. So we might be stuck with this slow-growth, high-inflation environment for a while. Luna: So the stagflation conversation isn't going away anytime soon. Lucas: No. And if anything, the consumer behavior shifts we're seeing now could embed stagflation deeper into the economy. That's the real story beneath the headline numbers. Luna: Alright, Lucas. Let's keep tracking this. Next week, I want to look at the housing market specifically — because I've noticed some interesting data on rents and home prices. Lucas: That's a great call. Housing is the other big piece of the stagflation puzzle. Let's dig into that next time.