Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / How Funflation Is Reshaping Consumer Habits and Fed Policy
Transcript
- Lucas: So there's this term floating around — 'funflation' — and normally I'd roll my eyes at a portmanteau like that. But the data behind it is actually pretty real, and it hits on something the Fed is wrestling with right now. Luna: I saw that CNBC headline this weekend about staying home no longer being a cost saver. It caught my eye because it feels counterintuitive — shouldn't a night in be cheaper than a night out? Lucas: That's exactly the assumption that's breaking down. Look at the latest CPI print from May: core CPI hit 336.1, up from 335.42 the month before. And within that, recreation services — things like streaming subscriptions, concert tickets, even home fitness apps — have been climbing faster than the headline number. Luna: Right, the Bureau of Labor Statistics data shows recreation costs up about 3.8 percent year over year. That's not crazy high on its own, but when you layer in shelter costs still sticky around 5 percent, it squeezes the budget from both ends. Lucas: Exactly. And the 10-year breakeven inflation rate just ticked up to 2.24 percent on Friday. That's a market-based measure of expected inflation over the next decade, and it's been stubbornly hovering around 2.2 to 2.3 for months. The bond market is basically saying: inflation isn't going away quietly, and funflation is part of that story. Luna: So the old recession playbook — you know, cook at home, cancel cable, stay in — doesn't work as well because the cost of staying in has gone up too. Netflix raised prices again last quarter, electricity rates are up, even the cost of a bag of coffee beans is higher. Lucas: Right, and that's the twist. Normally in a downturn, consumer spending shifts from services to goods — you buy more groceries and less restaurant meals. But when grocery inflation and home energy costs are also elevated, that substitution effect is muted. The Fed wants to cool demand, but if consumers can't easily trade down, then rate hikes hit harder. Luna: It also complicates the 'soft landing' narrative. We had the unemployment rate dip to 4.2 percent in June, and average hourly earnings are up to $37.60. So wages are growing, but if a bigger chunk of that raise goes to just maintaining the same lifestyle — whether you go out or stay in — then real spending power isn't improving much. Lucas: That's the key tension. Real wage growth, when you adjust for core PCE — which was at 130.1 in May — is positive but barely. And the Fed is watching core PCE more than headline CPI. So they might see inflation cooling on their preferred metric, while consumers are still feeling the pinch from recreation and shelter costs that CPI captures better. Luna: Is there any chance this is just a seasonal blip? Summer months usually see higher demand for travel and entertainment, which could push those categories up temporarily. Lucas: Possibly, but the breakeven rate didn't move on seasonal expectations — it moved on structural concerns. The bond market is pricing in that the Fed will have to keep rates higher for longer because inflation is stickier in services, and funflation is a services story. The 10-year Treasury yield at 4.57 percent, the 2-year at 4.31 — that's not a market expecting a quick cut. Luna: And that brings us back to the Fed's dilemma. They're data dependent, but which data? If they look at core PCE, they might see progress. If they look at CPI and breakevens, they see persistence. And if they listen to consumers — well, the Michigan sentiment survey last month showed inflation expectations at 3.1 percent for the year ahead, which is elevated. Lucas: You know, we talk about these macro numbers every day, but I think this funflation angle actually makes it tangible for listeners. It's not abstract — it's the decision between ordering takeout or cooking, and finding out both cost more than they did last year. That's the kind of friction that slows the economy in a weird, uneven way. Luna: It also makes me think about how we frame the show. We deliberately keep this ad-free — no corporate sponsors, no annoying mid-roll breaks — because we want the conversation to be clean and focused on what actually matters. If walking through the economy with us has made something click for you, and you want to support that approach, the link is buy me a coffee dot com slash fexingo. Lucas: Yeah, that's exactly right. It's a listener-supported model, and that's what keeps the analysis independent. No one is telling us what to say about funflation or the yield curve or anything else. So if you find value in that, the support is genuinely appreciated. Luna: Alright, back to the numbers. So if funflation is real and persistent, what does that mean for the Fed's next move? They've held the fed funds rate at 3.63 percent effective since June. The next meeting is late July. Lucas: Right now the CME FedWatch tool is pricing in about a 70 percent chance of a hold. But I think the funflation data creates a risk that they'll need to hike again if recreation costs don't moderate. The market is already pricing in a higher terminal rate — you can see it in the 2-year yield, which is up 2.3 percent in the last five days. Luna: But payrolls only grew 57,000 in June. That's weak. If the labor market is softening, does the Fed really want to tighten further and risk breaking something? Lucas: That's the debate. But JOLTS job openings actually ticked up to 7.594 million in May, from 7.585 million. So the labor market isn't collapsing — it's just cooling. The Fed might see that as room to stay focused on inflation. And if funflation keeps core services elevated, they may not have a choice. Luna: It's a tough spot. Consumers are getting squeezed by funflation, wage growth is decent but not keeping pace with the cost of staying in, and the Fed is watching both sides of the equation. It feels like the next few months will really determine whether we get a soft landing or something bumpier. Lucas: Agreed. And the bond market is already voting with its dollars. The yield curve is still inverted — the 10-year at 4.57, the 2-year at 4.31, but the 3-month at 3.69. That's a recession signal that's been flashing for over a year now. Funflation is just one more factor that could tip the balance. Luna: So for listeners, the takeaway might be: don't assume staying home is the safe, cheap option anymore. And don't assume the Fed sees the same inflation you do. The data is telling a nuanced story, and we'll keep watching it. Lucas: Exactly. Next time, we'll dig into the China producer price story — that jumped to a near four-year high in June, and it has implications for global supply chains and import prices here. But for now, thanks for spending part of your day with us.