Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Fed's Internal Battle Over Inflation Data
Transcript
- Lucas: So June CPI came in at 332.6, down from 333.98 in May. That's a tenth of a percent drop in the headline number. You'd think the Fed would be popping champagne, right? Luna: But they're not. The core CPI — excluding food and energy — barely moved. It's essentially flat at 336.1. And the Fed's favorite gauge, the PCE price index, actually ticked up. Lucas: Exactly. PCE went from 130.94 to 131.5 in May, the latest available. That's a 0.4 percent month-over-month annualized increase — not exactly disinflationary. So you've got this split screen: headline CPI falling, core CPI stuck, and PCE still climbing. Luna: And that split is fueling a real internal battle at the Fed. Hawkish members are pointing at core and PCE, saying, 'See, inflation isn't licked.' Doves are arguing the headline drop means the tightening cycle worked. Lucas: Right. And the bond market is sending its own signal. The 10-year breakeven inflation rate has risen to 2.26 percent, up from 2.20 two weeks ago. That suggests investors expect inflation to stay above the Fed's 2 percent target for a while. Luna: Wait, but if CPI is falling, why would breakevens go up? Isn't that the market's inflation expectation? Lucas: It is, but it's also influenced by real yields and the fact that the PCE is still perking up. The market may be looking past the temporary goods disinflation and focusing on stubborn services costs — things like rent, medical care, and insurance. Those are exactly the components that have been sticky all year. Luna: So the Fed hawks — like, you know, the more inflation-sensitive members — are probably saying, 'Look at breakevens, look at PCE, we can't cut yet.' Lucas: Precisely. Just last week, Kevin Warsh — a Fed governor who's been hawkish — homed in on three phrases in his public comments: 'persistent,' 'services-driven,' and 'above target.' That's basically his way of saying core inflation isn't falling fast enough. Luna: And the doves? They'd argue that goods prices are actually falling, and if you strip out the lagging shelter component, inflation is already below 2 percent. They want to ease before the economy slips. Lucas: Right. So the Fed is stuck in this tug of war. And for the average listener, what does it mean? It means interest rates are likely to stay at 3.63 percent — the current fed funds rate — for a while. Your mortgage rate, credit card rate, car loan — they're not coming down soon. Luna: Even as your grocery bill might be easing a bit. That's the weird disconnect. Headline CPI fell partly because gasoline prices dipped, but your rent check probably hasn't budged. Lucas: And that's why the Fed is divided. They're looking at different slices of the same data and drawing opposite conclusions. The hawks see a service sector that's still pricing aggressively. The doves see a consumer that's getting squeezed. Luna: So who's winning the argument right now? Lucas: Based on the fed funds futures, the market is pricing in only a 30 percent chance of a rate cut by September. So the hawks have the upper hand for now. But if another CPI report shows a big drop, that could shift quickly. Luna: And we get that data next month, right? The June CPI is already out, so July CPI comes in August. Lucas: Exactly. In the meantime, the Fed is watching every word from its members. Kevin Warsh's three phrases are being parsed like tea leaves. 'Persistent services inflation' — that's the key phrase. Luna: You know, if walking through the economy with us has made something click, it's partly because we don't have ads pushing us to rush through. That's a listener-supported choice. If you found today helpful, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps this show independent. We really appreciate it. Luna: So back to the Fed split — do you think this division is healthy or dangerous? Lucas: Healthy, actually. A little debate forces a more careful policy. The danger would be groupthink — all agreeing to cut or all agreeing to hold without questioning the data. As long as they're arguing over the right numbers, the decision is probably sound. Luna: So the bottom line for us as consumers: expect rates to stay put, but keep an eye on core services inflation. If that starts to fall, the doves might get their cut. Lucas: Exactly. And we'll be here to parse it when it happens. For now, the Fed is in a staring contest with inflation — and neither side is blinking.