Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Factory Job Cuts Signal a New Kind of Inflation
Transcript
- Lucas: So the headline that caught my eye this morning was from S&P Global, and it's a stark one: factory job cuts in June are approaching levels we haven't seen since the financial crisis and the early days of Covid. Luna: That's a pretty jarring benchmark. But how does that square with the fact that CPI is still creeping up? The May reading came in at 334, up from 332.41. Lucas: Exactly, and that's the puzzle. You'd think if factories are laying people off, demand would soften and prices would cool. But the inflation we're dealing with now isn't a goods inflation — it's core services. The core CPI, which strips out food and energy, rose to 336.1 in May. That's the stuff that's harder to bring down. Luna: Right, so the layoffs are concentrated in manufacturing, but the inflation is coming from things like rent, insurance, medical care. Two different parts of the economy moving in opposite directions. Lucas: Exactly. And the market is reflecting that split. The S&P 500 is at 7,401, down one and a half percent over the last five days. But the Russell 2000, the small-cap index, is actually up nearly two percent in the same period. The Russell is more domestically focused, more exposed to Main Street, and it's actually gaining. Luna: So small caps are betting on a soft landing, while large caps are worried about persistent margins? Or is it something else? Lucas: I think it's that small caps have already been beaten down so much that any good news — like a potential pause in rate hikes — lifts them. But the large caps, especially the tech names, are more sensitive to global demand and the fact that the Fed is still keeping rates at three point six three percent, which is not exactly restrictive enough to kill services inflation. Luna: And that's the thing — the 10-year breakeven inflation rate is at two point two three percent. That's market-implied inflation expectations. They're not flashing deflation. They're saying inflation will stay above the Fed's target for a while. Lucas: So here's where it ties together. Factory layoffs usually mean lower wage pressure in that sector. But services inflation is driven by wages in areas like healthcare, hospitality, childcare — and those labor markets remain tight. The JOLTS data last month still showed more job openings than available workers. Luna: So you can have a two-track labor market: goods-producing jobs weakening, service-producing jobs still strong. And because the Fed targets overall inflation, they can't ease off just because manufacturing is slowing. Lucas: Right. And S&P Global's report noted that factory output is also contracting. That's a double whammy: fewer workers and less production. But if that doesn't feed into lower services prices, the Fed stays put. The effective fed funds rate is three point six three, unchanged since May. Luna: So what does that mean for someone listening who's worried about their job in manufacturing, but also seeing their rent go up? Is the Fed's one-size-fits-all rate policy just not suited for this kind of divided economy? Lucas: That's exactly the criticism. The Fed's tools are blunt. They can't lower rates for manufacturing and raise them for services separately. And the data we're seeing — factory job cuts alongside rising core CPI — suggests that the economy is structurally changing. The pandemic accelerated automation in goods production, and those jobs may not come back even when demand picks up. Luna: So the layoffs are more structural than cyclical. That's a different kind of inflation risk — because if those workers can't find new jobs quickly, they spend less, which could eventually pull overall inflation down. But in the short term, services inflation stays sticky. Lucas: Exactly. And that's why the Fed is walking such a tightrope. The breakeven rate at two point two three is actually down from where it was a few months ago, so inflation expectations are moderating. But the actual CPI reading is still running above two percent. The Fed wants to see more progress before they cut. Luna: I want to come back to the Russell 2000 outperforming. If small caps are rallying on hopes of rate cuts, but the data doesn't support cuts yet, that seems fragile. Lucas: It is fragile. But remember, small caps are also more leveraged to the domestic economy. If the consumer stays resilient — and jobless claims are still low outside of manufacturing — then small caps could continue to grind higher. But if the factory layoffs spread to services, then we have a different problem. Luna: And we haven't even mentioned the headlines about Iran oil sanctions waivers. That could lower energy prices, which would help the CPI headline number. But core services wouldn't feel that. Lucas: Right, energy is volatile. The latest CPI already had energy prices falling. But the core — that's the sticky part. So even if gas gets cheaper, your rent and your insurance and your streaming subscriptions keep going up. Luna: Which brings us back to the idea that the inflation we're feeling isn't the same inflation the Fed is targeting with their headline numbers. There's a disconnect. Lucas: There is. And I think that's the most important takeaway for today. When you see headlines about factory job cuts, don't assume deflation is around the corner. The economy is producing two different inflation stories at the same time. Luna: Before we move on, I want to say — if walking through the economy with us has made something click, and if today's episode was worth a coffee to you, that's the link. It's buy me a coffee dot com slash fexingo. No pressure, just if it's been useful. Lucas: Yeah, totally. It keeps the show independent and ad-free, which we really value. And honestly, every bit helps us keep digging into these specific angles. Luna: So back to that disconnect — because I think we can drill down even further. One sector that bridges goods and services is auto insurance. It's tied to the cost of cars and the cost of repairs. And we've seen that spike. Lucas: Great point. Auto insurance premiums are up double digits year over year. That's a service, but it's being driven by the fact that new and used car prices went up during the pandemic and now repairs cost more because of higher labor and parts costs. So it's a hybrid. Luna: And that's not going away quickly. Even if factory job cuts depress demand for new cars, the existing stock of cars is more expensive to insure. So that line item in the CPI basket stays elevated. Lucas: Exactly. And that's the kind of persistence the Fed is worried about. The breakeven rate at two point two three suggests the market believes the Fed will eventually get inflation under control, but it's going to take time. The question is how much economic pain we absorb along the way. Luna: And the factory job cuts are the first sign of that pain. If it spreads, the Fed might have to choose between fighting inflation and protecting jobs. Lucas: That's the classic dilemma. And for now, they're still prioritizing inflation. The fed funds rate hasn't budged. But if the manufacturing weakness bleeds into services, that calculus could change. Luna: So keep an eye on the Russell 2000 versus the S&P 500. If small caps start to falter, that's a sign the weakness is spreading. Lucas: And watch the weekly jobless claims, especially in states with heavy manufacturing. If those spike, the two-track economy starts to converge — and that's when the Fed might have to act. Luna: Alright, thanks for walking through that with us. We'll keep tracking these crosscurrents.