Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Real Cost of Living Gap Inflation Numbers
Transcript
- Lucas: Look at the numbers for August, because they tell a story that doesn't match what you see at the checkout counter today. The Core PCE price index is sitting at 130.5, up slightly from 130.13 the month before, while the broader CPI holds steady at 334.1. On paper, that is a cooling economy. The rate of increase is slowing down. Luna: But if you have tried to buy groceries or pay for any kind of professional service lately, it feels like prices are just stuck at a new, higher altitude. They aren't going back down. Lucas: Exactly. And this is where the disconnect happens. We are seeing a persistent divergence between the macroeconomic data points that policymakers celebrate and the microeconomic reality of household budgets. It isn't just about goods anymore. The old playbook of buying cheaper TVs or clothes doesn't help when your rent, your insurance, and your healthcare are the ones driving the needle. Luna: Right, and with the labor market showing signs of faltering—jobs grew by only twenty-nine thousand in September—that wage pressure should theoretically ease, yet those service costs aren't budging. Lucas: That is the key friction point. Let's talk about the services sector specifically. While goods inflation has largely been tamed by supply chain normalization and lower energy costs, services inflation remains sticky. Think about the last time you booked a hotel, went to a restaurant, or needed home repairs. Those prices are set by local labor markets and operational costs, which don't adjust as quickly as global commodity prices do. Luna: So even though the Fed Funds effective rate is creeping up toward 3.75 percent, trying to cool things down, the underlying cost of providing those services has already baked in a lot of previous wage hikes. Lucas: Precisely. Companies raised wages to attract workers during the peak labor shortage. Now that hiring has slowed, with the unemployment rate ticking up to 4.2 percent, they aren't necessarily cutting staff immediately. Instead, they are maintaining margins by keeping prices high. It is a lag effect. The pain of the inflationary spike is being amortized over time through sustained high prices rather than a sudden deflation. Luna: It’s almost like the price level is rigid, even if the inflation rate—the speed at which prices rise—is finally coming down. Lucas: Yes, and that rigidity is what makes the 'cost of living' feel so much heavier than the 'inflation rate.' If inflation is two percent, but prices are permanently ten percent higher than they were three years ago, your baseline for survival has shifted. You can't go back to the old budget. Luna: And I think we need to mention the subtle shifts in product quality, too. Shrinkflation hasn't gone away; it has just become more sophisticated. Lucas: Absolutely. You mentioned the pantry earlier. Look at the private sector jobs report from ADP, which showed ninety thousand private jobs added in September, better than expected. That suggests the economy is still adding capacity, but manufacturers are using that efficiency to keep unit costs stable while quietly reducing package sizes. You are paying the same amount for less volume, which means your real cost per ounce is actually rising even if the sticker price looks flat. Luna: It’s a psychological trick, but also a financial one. If I don't notice the size change, I don't question the price, and my spending power erodes without me realizing it until I check my bank account at the end of the month. Lucas: Let's pause here for a moment. If walking through the economy with us has made something click, and you want to support independent analysis like this, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps the research ad-free and helps us dig deeper into these numbers. Luna: Yeah, it really does help us get the data right. Thanks for supporting the show. So, getting back to that services rigidity, what about insurance? Lucas: Insurance is perhaps the most glaring example of this sticky cost. Auto and homeowners insurance premiums have surged across the board. This isn't just about labor; it's about climate risk, repair costs for modern vehicles with all their sensors, and legal liabilities. These are structural shifts in the cost base that won't reverse just because the Federal Reserve raises rates by fifty basis points. Luna: So it’s not cyclical inflation. It’s structural. Once those premiums jump, they stay there because the underlying risk profile of insuring a home or a car has fundamentally changed. Lucas: Correct. And this ties directly into the housing market. We saw earlier that rent shocks are a major component of the CPI basket. As interest rates hover around the three-point-eight-eight percent daily rate, affordability for new homeowners is constrained. This forces more people into the rental market, driving up demand and thus rents, which then feeds back into the inflation calculation. Luna: It creates this feedback loop where high rates keep people renting, high rents drive up inflation, and then the Fed has to keep rates high to fight that inflation. It’s a tight knot. Lucas: A very tight knot. And notice the 10-year breakeven inflation rate is sitting at 2.36 percent, completely flat. This tells us that long-term market expectations for inflation are anchored. Investors aren't panicking about hyperinflation, but they aren't betting on deflation either. They expect stability at a higher price level. Luna: Which means the Fed is likely in a 'higher for longer' scenario regarding rates, not because they want to crush the economy, but because they know they can't force prices down easily once they've moved up. Lucas: Right. And this brings us to the gender disparity in the recent labor data. The headlines noted that men are losing ground in the labor market. Why does that matter for inflation? Because male-dominated sectors like construction, manufacturing, and logistics are heavily tied to goods production and physical infrastructure. Luna: So if those sectors are struggling, it could mean slower growth in goods availability or increased costs for building and transporting things, which would feed back into that goods inflation we thought was solved. Lucas: Exactly. If the supply side of the economy starts to constrict again due to labor shortages in critical industries, we could see a resurgence in goods prices. But for now, the dominant narrative is services. Services employ more people, and wages in services are stickier. When you combine that with the lack of downward pressure on rents and insurance, the 'average' consumer feels like inflation is out of control, even if the aggregate number says otherwise. Luna: It’s frustrating because policy makers talk about the aggregate, but households live in the individual categories. My aggregate might be fine, but my mortgage and my car insurance are breaking my budget. Lucas: That is the fundamental mismatch. The CPI is a weighted average. It assumes you consume the same mix of goods and services as everyone else. But if your personal inflation rate is driven by housing and health care, and those sectors are inflating faster than electronics or apparel, your wallet feels the pain regardless of what the S&P 500 is doing. Luna: So what should someone listening do with this information? How do they hedge against this structural shift in costs? Lucas: First, stop looking at goods discounts as a sign that your overall cost of living is coming down. Second, recognize that fixed-rate debt, if you can secure it, becomes a valuable asset in a high-price-level environment because you are paying back loans with dollars that are worth less in real terms, even if nominal wages haven't caught up fully. Luna: But for those who can't refinance, it’s mostly about budgeting for the new normal. Accepting that the pre-2021 price levels are gone and planning finances accordingly. Lucas: Precisely. It’s a mindset shift. We are no longer in a deflationary adjustment phase where prices correct themselves. We are in a high-inflation equilibrium where the goal is stability, not reversal. The challenge for consumers in late 2026 is managing cash flow against these sticky, non-discretionary expenses. Luna: It sounds like the burden has shifted from the government trying to cool demand, to the individual trying to navigate a permanently expensive world. Lucas: That is a fair summary. And as we look ahead, the key metric to watch isn't just the monthly CPI print, but the composition of that print. If services inflation starts to crack, we might see some relief. But until labor costs in the service sector truly normalize, that floor under consumer prices will remain high. Luna: So we’re waiting for a labor market correction that hasn't fully hit yet, hoping it drags those service prices down with it. Lucas: We are. And until then, the lesson is simple: the headline number is for the economists, but your personal basket is for you. Keep an eye on the specific lines items that hurt, not just the aggregate trend. Luna: Smart advice. Thanks for breaking down the nuance behind the numbers, Lucas. Lucas: Anytime. Let’s see if the next jobs report gives us a clearer signal on whether those service costs will finally start to loosen.