Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Service Inflation Is Keeping the Fed on Hold
Transcript
- Lucas: So the latest CPI reading came in at 332.4 for April — that's up from 330.29 in March. And if you look under the hood, the headline number is actually being held down by goods prices. The real story is services. Luna: Services inflation has been the stubborn piece for what feels like forever now. What's the latest breakdown? Lucas: Right. So core CPI ex food and energy hit 335.4, and the biggest driver there is shelter — rent and owners' equivalent rent — which is still running at around 5% annualized. But beyond shelter, we're seeing persistent increases in insurance, medical care, and even things like car repairs. Luna: And those are the categories the Fed watches closely because they're less volatile. Goods prices can swing with supply chains, but services are tied to wages. Lucas: Exactly. The Fed's preferred gauge, core PCE, came in at 129.6 for April — up from 129.32. That's still above their 2% target. And the 10-year breakeven inflation rate, which is a market-based measure of expected inflation, is sitting at 2.38%. So the market expects inflation to stay above target for a while. Luna: And that's why the Fed funds rate is still at 3.62% effectively. No cuts yet. Lucas: Right. The effective fed funds rate is 3.63% as of May 1, and the rate on reserve balances is 3.65%. So the Fed is essentially holding steady. The market has been betting on a cut later this year, but the data keeps pushing that timeline out. Luna: Let's talk about that labor market connection. The latest JOLTS data showed job openings surged to 7.6 million in April — that's the highest in nearly two years. Lucas: That's a huge number. And it tells you labor demand is still really strong. When employers are competing for workers, wages go up. And in service industries, labor is the biggest cost. So higher wages feed directly into higher prices for services like haircuts, restaurant meals, and hotel rooms. Luna: And it's not just low-wage services. We're seeing it in professional services too — legal fees, accounting, consulting. Those all have a big labor component. Lucas: Yeah. And that's the 'sticky services' problem the Fed keeps talking about. Goods inflation can be solved by fixing supply chains or finding cheaper inputs. But services inflation is structural — it's tied to the labor market and to housing costs, which are slow to adjust. Luna: So what does that mean for the average person? If you're renting, your rent is still going up. If you own a car, your insurance premium is rising faster than overall inflation. And if you need medical care, those costs are climbing too. Lucas: And the thing is, these aren't one-time price jumps. They're ongoing increases that compound. If your rent goes up 5% this year and another 5% next year, that's a 10% increase over two years. That's a real hit to purchasing power. Luna: And it's not just rent. Car insurance premiums have been rising at double-digit rates year over year. That's partly because repair costs have gone up — parts are more expensive, and labor rates are higher. Lucas: Let's talk about that feedback loop. When insurance companies see higher repair costs, they raise premiums. That pushes up the CPI insurance category. And then insurance is a service, so it contributes to core inflation. The Fed sees that and keeps rates higher. Higher rates make borrowing more expensive, which can slow the economy, but it also means your car loan or mortgage doesn't get cheaper. Luna: So the Fed is kind of stuck. If they cut rates too soon, services inflation could re-accelerate. But if they hold too long, they risk slowing the economy too much. Lucas: Exactly. And that's why you're hearing more Fed officials talk about 'patient' or 'data-dependent.' They want to see sustained evidence that services inflation is cooling before they move. And so far, the data isn't giving them that. Luna: One number that caught my eye: the ADP private payrolls report for May came in at 122,000 jobs added — stronger than expected. That's not a booming number, but it's solid. It suggests the labor market is still adding jobs, which keeps wage pressure on. Lucas: And that wage pressure is the key. If you look at average hourly earnings, they've been growing around 4% year over year. That's above the inflation rate, so real wages are actually positive. But it's also above the Fed's comfort zone because they worry that wage growth will keep services inflation elevated. Luna: So it's a balancing act. The Fed wants to see wage growth slow to something like 3% or 3.5% to be consistent with 2% inflation. But that might not happen unless the labor market softens. Lucas: Right. And there's another layer here: long-term unemployment is starting to creep up. There was a headline this week about long-term unemployment surging in the U.S. That's a sign that even though job openings are high, some workers are struggling to find new positions. That could eventually cool wage growth, but it's also painful for those workers. Luna: So the picture is mixed — strong job openings, but rising long-term unemployment. And services inflation staying sticky. What's the takeaway for someone trying to budget right now? Lucas: I think the takeaway is that inflation isn't going away anytime soon, especially in the services you use every day. Rent, insurance, medical care — those are the categories where you're going to feel the pinch. And don't expect the Fed to ride to the rescue with rate cuts this year. They're going to stay on hold until they see convincing evidence that services inflation is coming down. Luna: And that means if you're carrying variable-rate debt, like credit cards or an adjustable-rate mortgage, those rates are going to stay high. It's worth thinking about locking in fixed rates where you can. Lucas: Great advice. And if you're in the market for a car or a home, factor in that insurance and maintenance costs are rising too. It's not just the monthly payment. Luna: So services inflation is the story of 2026. And it's not going away quickly. Lucas: No, it's not. And that's why we keep talking about it — because it affects everyone's wallet. If walking through the economy with us has made something click, and you want to help keep these conversations going, a couple of dollars a month is genuinely what keeps this show ad-free. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a real difference. We don't have big corporate backing, so listener support is what keeps us independent. Lucas: Alright, back to the numbers. I want to look ahead to the next CPI release due in a couple of weeks. The consensus is expecting another modest increase, but the key will be the core services ex-shelter number — that's the one the Fed is watching most closely. Luna: And that's the part that's been the most stubborn. It includes things like medical care, education, and recreation. Those tend to be less price-sensitive. Lucas: Exactly. So if that number starts to decelerate, that's a real signal that services inflation is cooling. But if it stays elevated, the Fed stays on hold. And that's the bottom line for now. Luna: Good episode. Let's keep an eye on that next CPI print. Lucas: We will. Thanks, Luna.