Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Inflation Feels Stubborn in Late 2026
Transcript
- Lucas: The headline number is calming down, but if you are looking at the core components, things are still sticking around longer than anyone expected. Core CPI just came in at 338.9 for September, which is up from 337.76 the month before. It looks like the disinflation process has hit a wall in the services sector. Luna: Right, and that is exactly why people feel like their cost of living hasn't dropped. Goods are cheap again, but services are where the pain lives. Lucas: Exactly. You have insurance premiums, medical care, and housing all repricing upwards. The Fed knows this, which is why they kept the effective Fed Funds rate flat at 3.75 percent in early October. They are waiting to see if those sticky prices will finally break or if they will keep anchoring inflation expectations higher. Luna: It feels like the lag effect is still playing out. I remember paying for home renovations last year, and the quotes were double what they were two years ago. Lucas: That housing component is huge because it makes up such a big slice of the basket. When shelter costs stay elevated, it drags the whole index up. And with the PCE price index ticking up to 131.6 in August, the Fed's preferred gauge isn't moving fast enough for comfort either. Luna: So we are in this holding pattern where rates stay high to squeeze demand, but demand doesn't seem to be budging much in key areas. Lucas: Demand is there, but supply constraints in skilled labor and construction materials keep pushing prices up. It is not a classic recessionary deflation scenario. It is more like a structural bottleneck. If you look at the ten-year breakeven inflation rate, it ticked up slightly to 2.35 percent last week. Markets are starting to price in that this stickiness might be permanent for a while. Luna: Twenty-three-five basis points above the target. That is not exactly whisper-quiet inflation. What does that mean for someone trying to plan for retirement? Lucas: It means cash is losing purchasing power faster than you think, but bonds aren't offering enough yield to fully compensate yet. It creates this awkward middle ground where your savings account pays three point eight percent, but real inflation might be closer to four percent in some categories. You are slowly bleeding value unless you move into assets that hedge against service-sector inflation. Luna: Which usually means equities or real estate, both of which are volatile right now given the market dips we saw last week. Lucas: True. The S&P five hundred dropped one point five percent over the last five days. But that volatility is often noise compared to the slow grind of inflation eroding your base. The bigger issue might actually be fiscal policy. The U.S. budget deficit swelled to almost two trillion dollars for fiscal twenty-six. That is a twelve percent jump in a single year. Luna: Two trillion? That seems massive even for Washington. How does that connect back to my grocery bill or rent? Lucas: It connects through liquidity and confidence. When the government runs deficits that large, it has to borrow money. That increases the supply of Treasuries, which can push long-term yields up. Higher yields make borrowing expensive for everyone else, including you buying a house or a car. It also signals that there is no fiscal discipline to anchor long-term price stability. Luna: So the central bank is fighting inflation alone while the Treasury keeps adding fuel to the fire with spending? Lucas: That is a fair way to put it. It is a tug of war. The Fed is pulling back on liquidity by keeping rates restrictive, but the Treasury is flooding the system with debt issuance. Historically, this dynamic tends to be inflationary over the long run because it forces the central bank to eventually accommodate the debt somehow. Luna: Accommodate meaning print money or just accept higher inflation? Because neither sounds great for purchasing power. Lucas: Exactly. It creates a credibility problem. If investors start doubting the Fed's ability to control prices because fiscal policy is so loose, they demand higher inflation premiums. That pushes the breakeven rates up further, which then feeds back into wage demands and corporate pricing. It becomes a self-fulfilling prophecy. Luna: It feels like we are ignoring the elephant in the room about AI and labor costs. Everyone is talking about automation, but wages are still rising. Lucas: That is a really sharp point. There was a headline earlier today about women potentially being at greater risk of job losses in certain administrative roles due to AI. But overall, the labor market remains tight. Employers are still paying premium wages to retain talent, especially in tech and healthcare. So the wage-price spiral isn't happening in the traditional sense, but wages are just staying high relative to productivity gains. Luna: High wages drive up consumer spending, which keeps demand hot, which keeps prices up. It is a loop. Lucas: A loop that is hard to break without a significant shock. And we haven't seen that shock yet. The JOLTS data and PMI readings suggest the economy is slowing, but not crashing. It is grinding. And during a grind, inflation tends to be sticky rather than falling cleanly. Luna: So what should people do? Just accept higher prices forever? Lucas: No, you adapt. You stop expecting the low-inflation environment of twenty-twenty to twenty-twenty-three to return quickly. You lock in fixed-rate debt if you can, because future dollars will likely be worth less. And you invest in productivity-enhancing assets that can pass on costs to consumers. Luna: Locking in debt sounds good until interest rates go higher. Are we sure they won't? Lucas: They might. If inflation stays at three percent or above, the Fed may need to hold rates higher for longer. But even at three point eight percent, that is cheaper than the six percent mortgages we saw a few years ago. Relative value matters. You are comparing a known cost now versus an unknown, potentially higher cost later. Luna: I guess it is about managing expectations. Accepting that money buys less, but planning for it. Lucas: Precisely. If you treat inflation as a feature of the modern economy rather than a bug that will be fixed, you make better decisions. You diversify, you hedge, and you don't panic over monthly CPI reports that fluctuate by half a percent. Luna: Speaking of not panicking and supporting our work, we deliberately don't run ads on these shows. If you want to support that choice, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: It helps us keep this analysis independent and focused on the data rather than advertiser interests. Thanks for listening. Luna: Back to the topic, though. Do you think the AI narrative will eventually deflate service prices by making labor more efficient? Lucas: It could, but adoption is slow. Companies are hesitant to replace core functions with AI until the technology is reliable. Until then, they are relying on human labor, which remains expensive. So we might see a lag before AI actually impacts the CPI number significantly. Luna: A lag that could keep inflation stubborn for another year or two. That is a sobering thought. Lucas: It is. But understanding that lag is the first step to protecting your finances. If you know the prices aren't coming down soon, you stop waiting for the bottom and start investing based on the current reality. Luna: Agreed. It is better to act on what is happening now than hope for a return to normal that might never come. Lucas: Let's watch the next PCE release in November. If core prices dip below thirty-three-seven, we might finally see the trend reverse. Until then, stay cautious. Luna: Sounds like a plan. Keep your eyes on the services sector and your wallet ready.