Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Price Gap Between Wholesale and Retail You Are Paying
Transcript
- Lucas: So wholesale prices dropped three-tenths of a percent in June — that's the headline from last week's Producer Price Index report. The biggest reason: a steep decline in gasoline costs. Luna: And yet I'm still paying four-fifty a gallon at the pump near my place in Brooklyn. So where's that wholesale drop going? Lucas: That's exactly the question, and it gets at something that's been bugging me all year. The PPI — producer prices — fell. But the CPI we got for June was only down a fraction. And core CPI was essentially flat. So the wholesale savings aren't reaching us. Luna: Is that just companies pocketing the difference? I mean, margins have been pretty resilient. Lucas: Partly. But there's a structural thing here. Look at the import price data that came out Friday — prices on goods from China hit their highest level since 2008. So while domestic energy costs fell, the cost of imported finished goods actually rose. That's a countervailing force. Luna: So the PPI drop is mostly gasoline and maybe some other commodities, but the stuff we actually buy from stores — a lot of that comes from overseas, and that's getting more expensive. Lucas: Exactly. The PPI has a huge energy component. Strip that out, and core producer prices were up a tenth of a percent. Hardly deflationary. And then there's the pass-through lag — or lack of pass-through. Luna: I remember you talking about cost-plus pricing. Companies supposedly set prices based on their costs plus a fixed margin. But if costs go down, they don't exactly rush to lower prices. Lucas: Right. Cost-plus is a textbook concept. In reality, most companies price to what the market will bear. If they can keep prices high even as input costs fall, they will. Especially in an environment where consumers have gotten used to higher price levels. Luna: And the Fed's watching all this. The core PCE price index — their preferred measure — actually ticked up in May. It's at 130.1, up from 129.67. So that doesn't scream 'mission accomplished' on inflation. Lucas: No, it doesn't. And the Fed funds rate is still at 3.63 percent — they've held steady for months. The breakeven inflation rate, which is the market's expectation for inflation over the next ten years, actually crept up to 2.24 percent. That's still above the Fed's 2 percent target. Luna: So the market is saying inflation isn't dead yet. And the PPI drop might be a false signal if it's just gasoline. Lucas: That's the risk. If you look at the wholesale data, services producer prices actually rose. And construction prices. So it's not broad-based disinflation. It's a narrow energy-driven dip that might not last — especially with the Hormuz situation and the ECB talking about rate hikes again. Luna: Meanwhile, the World Cup gave bars and restaurants a bump. The Fed's Beige Book mentioned that. But it also said consumers are flashing warning signs — pulling back on discretionary spending. Lucas: Right. That's a key tension. You have a short-term boost from a global event, but underlying demand is softening. And if demand softens, companies might finally have to pass on those wholesale price declines to keep customers. But we're not there yet. Luna: So what's the takeaway for someone listening? Should they expect any relief at the grocery store? Lucas: I think the honest answer is: not soon. The wholesale to retail pipeline is sticky. And with import costs rising, especially from China, there's upward pressure on the things we actually buy — clothing, electronics, household goods. Gasoline might come down a bit more if crude stays weak, but that's a volatile category. Luna: It's almost like we need to track two different inflation rates: one for the stuff the Fed looks at, and one for the stuff we actually spend money on. Lucas: That's actually a really useful mental model. Your personal inflation rate depends on your consumption basket. If you drive a lot, you're benefiting from the gasoline drop. If you're buying a lot of imported goods, you're not. And if you're renting, well, we did a whole episode on that — rents are still climbing faster than CPI. Luna: One thing that struck me in the latest CPI release: the shelter index is still up. And that's a huge weight in the CPI. So even if goods inflation moderates, services inflation — especially housing — is keeping the headline elevated. Lucas: And services inflation is stickier. It's wages, it's rents, it's insurance — things that don't reverse quickly. The PPI for services was up. That feeds into final prices later. So the wholesale number might look good today, but it's not a clean signal. Luna: Alright, so let's say I'm a business owner listening. How should I think about pricing right now? Lucas: I'd be cautious about assuming the wholesale drop is permanent. It's tied to energy, which is geopolitical. If you're a retailer, your imported goods costs are still rising. I'd focus on efficiency and maybe hold prices steady rather than cutting them, because you might have to raise them again if energy rebounds. Luna: And for consumers? Any advice beyond 'keep an eye on your own basket'? Lucas: I'd say be skeptical of any headline that says inflation is licked. Look at the categories you actually spend on. And if you see a retailer actually cutting prices, that's notable — it means demand is weak enough that they have to. But most won't. Luna: Before we wrap, I want to mention something. If you find these conversations helpful, and you want to support the show staying independent and ad-free, there's a simple way. We have a page at buy me a coffee dot com slash fexingo. It's a small gesture, but it genuinely helps us keep doing this. Lucas: Yeah, and we really appreciate that. It allows us to spend time digging into data like this PPI report and not worry about sponsors. Anyway, back to the inflation puzzle — I think the key date to watch is the next CPI release, and also the Fed's July meeting. If core PCE stays elevated, they might lean hawkish again. Luna: And if the wholesale drop continues but doesn't reach consumers, that's a story we'll definitely revisit. Lucas: Absolutely. For now, the gap between what businesses pay and what we pay is wider than the headlines suggest. Keep your eyes on your own wallet. That's the real inflation gauge.