Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Sticky Price Illusion Behind Your Grocery Bill
Transcript
- Lucas: There is a specific kind of frustration that comes from looking at the latest Consumer Price Index report and then walking into a grocery store. The headline number might say inflation has cooled to four percent, but the price of olive oil hasn't budged since last spring, and the premium coffee blend is still twenty-two dollars a bag. Luna: It feels like the government is reporting on one economy while I am living in another, specifically the one where nothing ever goes back down. Lucas: Exactly. And that disconnect isn't just psychological. It is driven by something economists call sticky prices. In many sectors, once a company raises its prices, it rarely lowers them, even when their own input costs drop or when competition intensifies. Today, we are going to drill into why those prices get stuck there, and what it means for your wallet in late 2026. Luna: So you are saying businesses are intentionally keeping prices high because they can, rather than because they have to? Lucas: Partially, but it is more structural than just greed. There is a concept called menu costs. If a retailer changes the price tag on every single item in the store, or updates digital shelf labels across thousands of locations, that takes time, money, and technical effort. So they hesitate to change prices frequently, leading to asymmetry. Prices go up fast, but they come down slowly. Luna: That makes sense for physical goods, but does it apply to services too, like haircuts or car repairs? Lucas: Absolutely. Services are even stickier. Think about your local mechanic or dentist. They set their rates based on long-term contracts, staff wages, and overhead. Even if the cost of the tools they use drops slightly, they are not going to lower their hourly rate. The inertia is built into the service model itself. Luna: But if competitors are lowering prices, shouldn't the market correct that? Why would customers keep paying the higher rate? Lucas: Because consumers are loss-averse. Studies show that people react much more strongly to a price increase than they do to a price decrease. A store raising prices by five percent gets angry calls. A store lowering prices by five percent gets... maybe a few extra loyalists. Most retailers prefer the stability of the higher price over the risk of customer backlash. Luna: So essentially, the fear of losing customers to a discount outweighs the benefit of attracting new ones with lower prices. Lucas: Right. And this creates a floor under inflation. You see it clearly in the housing market right now. Renters are feeling the pinch because lease agreements lock in prices for twelve to twenty-four months. When a new tenant signs, they absorb the current high rate, and that becomes the new baseline for everyone else. Luna: I noticed that with my own rent renewal. Even though the neighborhood vacancy rate went up, my landlord didn't budge on the monthly increase. Lucas: That is a textbook example. The landlord knows you are locked in. Switching apartments is expensive and disruptive. So they hold the line. This is why the CPI, which averages everything, looks different from your personal experience. The average smooths out the sticks. Luna: Does this mean the Fed's interest rate hikes are less effective than they think? Lucas: They are less effective at bringing prices down, yes. Higher rates cool demand, but they don't force companies to slash prices. Companies might slow hiring or cut back on expansion, but they protect their margins by keeping prices steady. That is why we see wage growth stagnating before we see significant price drops. Luna: It sounds like the burden of adjustment falls entirely on the worker, not the corporation. Lucas: Precisely. And we see this in the technology sector too. Software subscriptions often only renew annually. If a SaaS company raised prices last year, they are riding that wave for twelve months, regardless of whether their server costs have decreased. The stickiness is baked into the subscription cycle. Luna: So if I signed up for a cloud storage plan in 2025, I am paying the old inflated rate until my next billing date. Lucas: Unless you cancel, which most people don't do due to inertia. But let's look at the grocery aisle again. Shrinkflation was huge during the peak inflation years. Now that raw material costs have stabilized, why aren't packages returning to their original size? Luna: Because the price hike is already accepted. Consumers have normalized the smaller portion as the standard. Lucas: Exactly. Once you accept the new normal, the status quo bias kicks in. Changing back requires a conscious decision and potential scrutiny. So manufacturers keep the small package at the same price, effectively maintaining their margin boost without having to raise the sticker price further. Luna: That is a brilliant way to frame it. It is not just about rising costs; it is about the reluctance to reverse gains. Lucas: And this brings us to the current market environment here on October twenty-first, twenty-twenty-six. With the S&P five hundred hovering near seven thousand seven hundred fifty-seven, corporate profits remain resilient. They don't need to cut prices to survive. They have the pricing power to hold firm. Luna: So the stock market performance is actually a signal that these sticky prices will persist longer than analysts predict. Lucas: I would argue it is a confirmation. When earnings reports show strong margins despite slowing revenue growth, it means companies are successfully resisting price cuts. They are absorbing the volume slowdown through maintained prices, not discounts. Luna: But doesn't consumer debt eventually force their hand? If people stop buying because prices are too high, sales drop, and then prices must fall. Lucas: Eventually, yes. But we are seeing a bifurcation in the market. Luxury and essential goods remain sticky. Discretionary items might see discounts, but the core basket of goods—food, energy, housing—remains rigid. It is a slow bleed rather than a crash. Luna: So for the average listener, the lesson is that low inflation headlines do not mean cheap groceries. Lucas: Correct. Low inflation means prices are rising slower, not that they are falling. Understanding sticky prices helps you anticipate where costs will stay high. It also helps you understand why your budget feels tight even when the news says the economy is stabilizing. Luna: It shifts the focus from blaming external factors to understanding the structural rigidity of modern pricing. Lucas: And it highlights the importance of negotiation. In markets with sticky prices, the only way to get a better deal is often to switch providers or negotiate directly, bypassing the automated pricing algorithms. Luna: Which is exhausting, but apparently necessary in a sticky-price economy. Lucas: Unfortunately, yes. Before we wrap up, I want to mention something important. If walking through the economy with us has made something click, and you want to support this ad-free format, that link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Your support keeps the research deep and the analysis sharp, so thank you for that. Lucas: Now, back to the data. One final thought on the UK today. Their inflation just jumped to three point five percent, cementing rate hike expectations. This shows that sticky prices are a global phenomenon, not just an American one. Central banks are fighting the same inertia everywhere. Luna: It really underscores that no amount of rate hikes can easily untangle a web of entrenched pricing strategies. Lucas: Right. And as we head into the end of the quarter, watch the services sector closely. That is where the stickiness is deepest. Goods prices may normalize, but services will likely hold the line, keeping your personal inflation rate above the national average. Luna: So the real test for your wallet this winter won't be the price of TVs, but the price of heating and healthcare. Lucas: Exactly. Keep an eye on those service indices. They tell the true story of what we are actually paying to live our daily lives. Luna: And if you think prices are finally coming down, remember: they rarely do. Lucas: A good reminder as you plan your holiday budget. Thanks for listening.