Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Check Reveals Inflation Math
Transcript
- Lucas: So the May CPI number landed at 4.2 percent annual inflation — highest in three years. And a lot of people see that headline and think, okay, everything is getting more expensive. But the weird thing is, if you look under the hood, a huge chunk of that number is coming from one category: shelter. Luna: Right, and shelter makes up about a third of the CPI basket. So when that component doesn't cool, the headline number can't really come down much. Lucas: Exactly. And here's the twist — the way the Bureau of Labor Statistics measures shelter is backward-looking. They use something called owner's equivalent rent, which basically asks homeowners, 'If you were renting your own home, how much would you pay?' That survey data lags real market rents by six to twelve months. Luna: So we might be looking at rent increases from late 2025 that are still feeding into the CPI today. Lucas: Precisely. Meanwhile, real-time indices from places like Apartment List or Zillow show that asking rents in many markets have actually flattened or even dipped in the first half of this year. But CPI hasn't caught up yet. Luna: That's a big gap. Because if the official data is still reflecting old rent spikes, then the Fed might think inflation is stickier than it actually is. Lucas: And that has real consequences. The effective federal funds rate right now is 3.63 percent. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — is at 2.31 percent. That's still above the Fed's 2 percent target. Luna: So the bond market is basically saying, 'We don't think inflation is fully beaten yet.' Lucas: Right. And part of that is because shelter costs are expected to stay elevated for a while. Even if new leases are cheaper, existing tenants renewing at higher rates keep the average rent high. And that renewal effect takes years to wash through. Luna: So if you're a renter who signed a lease in 2024, you might be paying 20 percent more than you were three years ago. But if you moved this month, you might actually see a slight discount. Lucas: Exactly. And that divergence is what makes the inflation narrative so messy right now. Core CPI ex food and energy is at 336.1, up from 335.42 the month before — so still ticking up. But if you strip out shelter, core goods inflation is actually pretty tame. Luna: That's why the Fed has been so cautious. They're looking at core PCE, which also weights shelter heavily. That index is at 129.6, up from 129.32. Not falling fast enough for comfort. Lucas: So the question becomes: how long until the official shelter data catches up with reality? Some economists think we'll start to see it cool by the fall. But if energy prices keep rising — we just had wholesale prices jump 1.1 percent in May on a surge in energy — then that could offset any shelter relief. Luna: It's like the economy is playing whack a mole. Shelter cools, but energy heats up. Or services cool, but goods spike again. Lucas: Yeah. And that's why the ECB just hiked rates for the first time since 2023 — because the Iran conflict is driving up energy costs globally. That feeds into our import prices, which feeds into CPI. Luna: So even if your rent is stable, you might pay more at the pump or for heating. That also shows up in inflation. Lucas: Exactly. And it's worth noting that the Fed's favorite inflation gauge — core PCE — has been hovering around 2.8 percent annualized. That's still above target. So they're in a tough spot: do they hold rates where they are, or do they cut if they think shelter is about to drop? Luna: And the market is pricing in a potential cut later this year, but it's not certain. The breakeven rate suggests investors are hedging. Lucas: Right. So for the average person, the takeaway is: don't just look at the headline CPI number. Ask what's driving it. Right now, shelter is the engine. And until that starts to decelerate in the official data, inflation will feel sticky. Luna: And if you're a renter, maybe you have a little more negotiating power than you did a year ago. But if you own a home, your imputed rent is still going up in the government's eyes. Lucas: That's the thing — owner's equivalent rent affects homeowners too. Even if your mortgage is fixed, the CPI assumes your housing cost is rising. So it's a weird phantom cost that influences policy. Luna: It makes you wonder if the official numbers really reflect what people feel at the checkout counter. Lucas: They do — but with a lag. And that lag can mislead. So when you hear 'inflation is 4.2 percent,' remember that a big piece of that is a backward-looking rent survey. Luna: It's a good reminder that data is never neutral. It's constructed with assumptions. Lucas: And speaking of construction — this show is also built on a certain assumption: that we can do this without ads. That's only possible because a small group of listeners chips in each month through buy me a coffee dot com slash fexingo. If you've found these inflation deep dives useful, that's the thing that keeps the lights on. Luna: Yeah, it's a small community thing. No pressure, just if it's added value for you. Lucas: Exactly. So back to the data — one more thing to watch is the Fed's Jackson Hole symposium in August. That's where they might signal a shift if shelter data starts to cooperate. Luna: And we'll be watching the July CPI release to see if the lag finally starts to close. Lucas: For sure. In the meantime, keep an eye on your own rent or mortgage — that's your personal inflation rate, and it might diverge from the government's. That's worth knowing.