Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the Fed Measures Your Pain Beyond CPI
Transcript
- Lucas: So the April CPI came in at 332.4 — that's up from 330.29 in March. Headline inflation is still there, but the conversation today is actually about something different. Luna: You're talking about the gap between what the official number says and what people feel, right? Lucas: Exactly. The Bureau of Labor Statistics updates the CPI 'basket' every two years — what goods and services they track, and what weight each one gets. But your personal basket is almost certainly different from the government's. Luna: Right — if you're a renter in a city where rents went up 8 percent year-over-year, your personal inflation rate is way higher than someone who owns their home and has a fixed mortgage. Lucas: That's the key insight. The CPI's shelter component — which includes rent and owners' equivalent rent — makes up about a third of the index. But the BLS uses a six-month lag in how they measure it, so the current rent spike we've been seeing since last fall is only now starting to show up in the official numbers. Luna: So when the headline says inflation eased to 3.4 percent in April, that's partly because the rent piece hasn't fully caught up yet. Lucas: Right. And meanwhile, the Fed's preferred gauge — the core PCE price index — came out today at an annual rate of 3.3 percent. That's exactly in line with expectations, but it's still above the Fed's 2 percent target. Governor Goolsbee was on CNBC this morning saying energy inflation has been 'more persistent than expected.' Luna: Energy is another place where the official number and the personal experience diverge. If you drive a lot or heat an older home, energy costs are a bigger chunk of your budget than the average consumer. Lucas: Exactly. The CPI weights energy at about 7 percent of the overall index. But for low-income households, it's closer to 15 or 20 percent. So when gasoline prices go up, they feel it much more acutely than the headline number suggests. Luna: And then there's used cars. We did an episode on that a few weeks ago — prices are climbing again after a dip. That's another category with a lot of variation. Lucas: Right. If you bought a used car last year, your inflation experience is different from someone who leases a new one every three years. The point is, the CPI is an average — it's designed to measure the cost of living for the typical urban consumer. But 'typical' is a statistical fiction. Luna: So what does this mean for the Fed? They're watching core PCE, not CPI, and that's running at 3.3 percent. Markets are pricing in a potential rate cut later this year, but today's data doesn't exactly scream 'mission accomplished.' Lucas: No, it doesn't. And you heard Kashkari today saying the inflation fight takes priority, even though the labor market is in decent shape. So the Fed is essentially saying: we're not cutting until we see sustained progress across all the measures they care about. Luna: And that includes things like the ten-year breakeven inflation rate — which dropped slightly to 2.39 percent yesterday. So bond markets are a bit more optimistic than the Fed is. Lucas: Right. The breakeven is basically the market's expectation for average inflation over the next decade. At 2.39, it's above the Fed's target but not alarmingly so. So there's a tension: the bond market thinks inflation will cool gradually, but the Fed needs to see it in the actual data before they move. Luna: And speaking of data we see every day — there's something interesting about how the BLS actually collects prices. They send people to stores, they scan receipts, they scrape online listings. But they only update the basket weights every two years. So between updates, the basket becomes a bit of a relic. Lucas: That's a great point. For example, streaming services barely registered in the CPI basket a few years ago. Now they're a significant expense for many households. But the current basket — which was last revised in January 2025 — might not fully capture how much people are spending on subscriptions versus, say, cable TV. Luna: And that's one reason the official inflation rate can feel low compared to your own experience. If your spending is heavy on categories that are rising fast in price — like rent, energy, and used cars — you're carrying a heavier burden than the average. Lucas: Exactly. So we can look at the April CPI number of 332.4 and say, okay, inflation is moderating. But for the renter in Austin whose lease just went up 12 percent, or the driver in Chicago paying $4.50 a gallon, that number doesn't match their reality. Luna: And the Fed knows that. That's why they focus on core PCE — it's broader, it's more sensitive to shifts in consumer behavior, and it's the measure they trust most for policy. Lucas: Right. And core PCE today came in right on expectations. So the data isn't surprising markets, but it's not giving the Fed the green light either. We're in a wait and see mode, probably through the summer. Luna: And for listeners who want to track their own personal inflation rate, there are actually calculators online where you can input your spending and see how it compares to CPI. It's eye-opening. Lucas: Yeah — it's a good exercise. And if walking through the economy with us has made something click, we do have a way to keep this podcast going ad-free. It's a small thing, but listeners who find value here can support the show at buy me a coffee dot com slash fexingo. Luna: It really does help us keep the lights on and avoid running ads. No pressure, just if it's useful to you. Lucas: Exactly. So back to the data — one thing I want to highlight is the difference between the CPI and PCE in terms of how they treat healthcare. CPI uses out-of-pocket costs, while PCE includes what employers and insurers pay. That's a big reason PCE tends to run a bit lower. Luna: Right — and that's another layer of the 'gap' we're talking about. If your employer covers most of your health insurance, your personal inflation might be lower than someone who pays full freight on the ACA marketplace. Lucas: So the takeaway is: don't just look at the headline CPI number. Look at the components that matter to you. The BLS releases detailed tables every month — you can see rent, energy, food at home, transportation services. That's where the real story is. Luna: And with the Fed likely holding steady through the summer, those component trends will be the ones to watch. If rent starts to cool and energy stabilizes, we might see core inflation drift lower by the fall. Lucas: That's the hope. But as Goolsbee said this morning, energy has been stubborn. And with geopolitical uncertainty still in the mix, it's too early to declare victory. We'll keep tracking it episode by episode.