Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Inflation Feels Worse Than the Headline Number
Transcript
- Lucas: So consumer sentiment hit a fresh record low in May — that's according to the University of Michigan survey released Friday. And the headline reason is pretty straightforward: Iran war rattling energy markets, higher gas prices, general economic anxiety. Luna: Right. But here's what I find interesting — the official CPI number for April came in at 332.4, up only about 0.6 percent from the prior month. That's not great, but it's not catastrophe territory either. So there's a clear disconnect between what the index says and what people feel. Lucas: That's exactly what I want to dig into today. Because the CPI is a weighted average of a basket of goods and services. And that basket, by design, smooths out a lot of the sharp price movements that actually hit households. Gasoline, for example, has a weight of about 3.5 percent in the overall CPI. So even if gas spikes 20 percent — which it has in some regions over the past month — the headline number only moves by roughly 0.7 percent from that one component. Luna: Meanwhile, if you're someone who drives to work every day, that 20 percent spike is very real. It's not 0.7 percent of your budget — it's probably more like 5 or 6 percent of your monthly spending. Lucas: Exactly. And the same logic applies to food. Food at home has a weight of about 8 percent in CPI. But for lower-income households, it's often double that share of spending. So when the Iran situation pushes up grain and shipping costs, the pain is concentrated in a demographic that the index doesn't represent well. Luna: I want to bring in another data point here. The ten-year breakeven inflation rate — that's the bond market's expectation for average inflation over the next decade — is sitting at 2.40 percent, up just a tick from 2.39 yesterday. So markets aren't panicking about long-term inflation. They see this as a temporary geopolitical spike. Lucas: Which makes sense, but it also highlights the gap between Wall Street's time horizon and Main Street's. If you're living paycheck to paycheck, a six-month spike in fuel and food isn't 'temporary' — it's a budget crisis. And that's exactly what the Michigan survey is capturing. The index hit 62.3 in May, which is below the pandemic-era lows. Luna: So let's talk about what's actually in that CPI basket versus what's hitting people. Housing, for example, is the biggest component at roughly 33 percent. And rent inflation has been cooling — we did a whole episode on that. But the AI economy is pushing up wages for blue-collar workers in logistics and manufacturing, which creates a different kind of inflationary pressure. Lucas: Right, and that's the fascinating tension right now. On one hand, the ai driven productivity boom is actually disinflationary in the tech sector — you're seeing lower costs for certain services, automation bringing down prices. On the other hand, the reshoring and manufacturing buildout is driving up demand for labor and materials. So you have two opposing forces. Luna: And then add geopolitics on top. The Putin-Xi talks about reviving that gas pipeline, the Iran conflict, supply chain disruptions — these are all cost-push shocks that hit specific categories hard. The CPI might show 2.5 percent annualized, but the variance across categories is enormous. Lucas: Let's put some numbers on that. The core CPI — which strips out food and energy — came in at 335.4 in April, up from 334.17. That's about 0.37 percent month over month. But energy alone was probably up 2 or 3 percent in that same period. So the headline number is being dragged down by the core, which is heavily weighted toward services like medical care and education — things that don't change much month to month. Luna: Which means if you're not buying a lot of medical services or tuition this month, but you are filling up your tank and buying groceries, your personal inflation rate could be 4 or 5 percent even as the official number says 2.5. Lucas: That's the concept of 'inflation inequality' that some economists have been pushing. The Bureau of Labor Statistics actually publishes experimental CPI data by demographic group. And the numbers show that households in the bottom quintile have experienced inflation about 0.8 to 1.2 percentage points higher than the top quintile over the past two years. Because they spend a larger share on goods that are currently spiking. Luna: So when you hear consumer sentiment is at a record low, it's not just vibes. It's a real divergence between the aggregate data and the lived experience of a large chunk of the population. Lucas: And that has political implications, obviously. Kevin Warsh is being sworn in as Fed chair today, and he's inheriting an economy where the official inflation numbers look manageable, but the public is deeply unhappy. His challenge is going to be communicating that the Fed sees this, and that it's not ignoring the skew. Luna: Before we go further — I want to pause for a moment. A quick note from us. Lucas: Sure. Look, this podcast doesn't run ads. That's a deliberate choice — we want these conversations to be accessible to anyone who's curious. If you find them useful, the only way that keeps going is listener support. Luna: Yeah. If today's episode was worth a coffee to you, you can head to buy me a coffee dot com slash fexingo. That's it — no tiers, no perks, just knowing you're helping keep it ad-free. Lucas: Exactly. And we really do appreciate it. Now — back to the inflation gap. One of the things I think gets overlooked is how the AI economy might actually be widening this gap further. Luna: How so? Lucas: Well, the wealth effect from rising stock markets — the S&P 500 is at 7,473, up 1 percent in the last five days, the Russell 2000 up over 3 percent — that disproportionately benefits higher-income households who own equities. So they feel wealthier, and that can actually drive demand-side inflation in luxury goods and services. Meanwhile, lower-income households don't have that buffer, and they're feeling the cost-push inflation from energy and food. Luna: So you have demand-pull inflation at the top and cost-push inflation at the bottom, happening simultaneously. And the CPI averages them together into one number that doesn't fully capture either. Lucas: Right. And the Fed's tools are blunt. They can raise or lower the federal funds rate — which is currently at 3.64 percent, flat for a while now. But that doesn't target one demographic's inflation over another. It hits the whole economy. Luna: There's also the question of whether the Fed's preferred inflation measure — the PCE price index — tells a different story. Core PCE is at 129.3, up from 128.9. That's about 0.3 percent month over month. But PCE has a different weighting than CPI. For example, it gives less weight to housing and more to healthcare. Lucas: Which is why the Fed tends to rely on PCE — it's considered more stable and less volatile. But for the average person, that stability can feel like the central bank is out of touch. If your rent is up 6 percent year over year, you don't care that the PCE says inflation is 2.2 percent. Luna: So what would you do if you were Kevin Warsh? He's coming in with a reputation as a hawk. But the data is messy. Lucas: I think he'll focus on core services ex-housing — that's the component that's most tied to wage growth and domestic demand. If that stays sticky, he might lean toward holding rates steady or even hiking. But the geopolitical uncertainty makes forward guidance difficult. You don't want to overreact to a supply shock that might reverse in six months. Luna: Speaking of which — gold has actually pulled back a bit. It's at $4,521, down 0.7 percent over five days. And the gold ETF, GLD, is down 1.1 percent. That suggests some of the safe-haven buying is unwinding, maybe on hopes of de-escalation. Lucas: Yeah, the market is pricing in a relatively contained conflict. But if you look at the silver price — it's down 1.5 percent, and mining stocks are off 2.4 percent. So there's definitely some risk-off rotation happening. But it's not panic. Luna: Let's bring it back to the listener. If you're someone who's feeling the squeeze, what's the takeaway from this episode? Lucas: I think the key insight is that the official inflation numbers are real — they're not fake — but they are an average. And averages hide distribution. If you track your own spending categories, you can get a sense of your personal inflation rate. And that might be higher than what the headlines say. That doesn't mean the data is wrong — it means you need to look at the components, not just the top line. Luna: And from a policy perspective, it means the Fed has a communication challenge. They need to acknowledge that the aggregate numbers don't tell the whole story, especially when geopolitics and technology are pulling inflation in different directions for different people. Lucas: Absolutely. And that's probably the most important thing to watch in the coming months — not just the CPI print, but how the Fed talks about it. Warsh's first press conference will be telling. Luna: Alright. That's a good place to leave it. Thanks for listening, everyone.