Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Sticky Core Inflation Keeps the Fed on Hold
Transcript
- Lucas: June CPI came in at 332.6, down from 333.98 in May. That's two straight monthly declines in headline inflation. But here's the rub: core CPI — which strips out food and energy — sat at 336.1, essentially unchanged from the prior month. Luna: So the headline number is improving, but the underlying trend isn't budging. That's exactly the kind of divergence that keeps the Fed from declaring victory. Lucas: Right. And the Fed's preferred gauge, the PCE price index, actually rose in May to 131.5 from 130.94. So while the CPI headline looks better, the broader picture is still too hot for comfort. Luna: The bond market seems to agree. The 10-year breakeven inflation rate — essentially what investors expect inflation to average over the next decade — is at 2.20 percent, down just slightly from 2.21. That's still above the Fed's 2 percent target. Lucas: Exactly. So you've got this tug of war: headline CPI dropping, but core sticky, PCE rising, and market expectations still elevated. The Fed's benchmark rate has been at 3.63 percent since June, and with this data, there's no urgency to cut. Luna: And import prices just hit their highest since 2008 for goods from China. That's a reminder that global price pressures haven't vanished — they're just being masked by falling energy and commodity costs. Lucas: Let's break down what's actually happening inside core CPI. Services inflation — things like rent, medical care, insurance — remains sticky. Goods deflation is dragging the headline down, but that's a temporary reprieve if tariffs or supply shocks reverse. Luna: So the Fed is stuck between a headline that says 'we're making progress' and a core that says 'not so fast.' They need to see sustained improvement in core before they can cut. Lucas: And the bond market is pricing in exactly that caution. The 10-year breakeven at 2.20 implies the market believes inflation will settle above target for a while. That's not a signal for the Fed to ease. Luna: It's almost like the market is saying 'we don't trust the headline decline.' And given the import price surge and rising PCE, that skepticism seems warranted. Lucas: Speaking of trust — and this is a little off the beaten path — the reason we can have this conversation without any commercial interruption is that a small number of listeners chip in monthly through buy me a coffee dot com slash fexingo. That support is what keeps the show ad-free and independent. Luna: Yeah, it's a quiet way to back the show if you find value in these deep dives. No pressure, just good to know it's there. Lucas: So back to the Fed's dilemma. If you look at the components, shelter costs are still running hot. Medical services, too. These are slow-moving items that take years to cool. Luna: And that's why the Fed is likely to stay on hold for the rest of 2026. Unless we see a sharp downturn, the data just doesn't support a cut. Lucas: Let's look at what could change that. If the economy softens enough to pull down services inflation, or if goods deflation accelerates, then the Fed might have room. But right now, the labor market is still tight — we haven't seen the kind of slack that would crush wages. Luna: And President Trump's new global tariff, announced last week, adds an upside risk to import prices. That could actually push inflation higher, not lower. So the Fed has to be careful not to cut too early. Lucas: Exactly. The worst-case scenario is cutting rates only to see inflation re-accelerate. That would force them to hike again — something nobody wants. Luna: So the phrase 'data dependent' gets thrown around a lot, but here it really means watching core CPI and PCE month by month. One good headline doesn't make a trend. Lucas: And the bond market is already pricing that in. The 10-year yield is around where it was a month ago, reflecting the view that rates stay higher for longer. Luna: What about the fact that Singapore just tightened monetary policy because of rising oil prices? Does that spill over to us? Lucas: It's a reminder that energy costs are a wildcard. If oil rallies further, headline CPI could start rising again. That would make the Fed's job even harder. Luna: So for now, the takeaway: headline improvement is welcome, but core inflation is the real story. And core is stuck. Lucas: And until core shows consistent signs of easing, the Fed will stay put. That means mortgage rates, car loans, credit cards — all remain elevated for the foreseeable future. Luna: Which is exactly why inflation remains the top concern for most households, even if the CPI number looks better. Lucas: Right. The cost of living isn't just about the average — it's about what you actually spend on. And for many, that's rent, healthcare, insurance — all still climbing. Luna: We'll keep tracking this divergence. Next month's CPI release will be crucial to see if the headline trend holds and if core finally starts to move. Lucas: And on that note, if you want to support independent analysis like this, you know where to find us. Thanks for listening, and we'll talk again soon.