Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Inflation Paradox Why Prices Stick
Transcript
- Lucas: Let’s look at the numbers sitting on our desks right now. Oil is down over two percent in five days, copper is sliding, and gold has pulled back three percent. On paper, this looks like a massive disinflationary wave crashing into the system. Luna: But the actual inflation print tells a different story, doesn't it? Core CPI just came in at three hundred thirty seven point eight, up slightly from the previous month. Lucas: Exactly. That is the paradox we need to unpack today. We have commodity prices falling sharply, yet the services sector keeps pushing headline inflation higher. It feels like we are watching a tug of war where the rope isn't moving as much as the players are sweating. Luna: Right, and if you walk through that complexity with us every day, you know exactly how vital listener support is to keep this ad-free. Lucas: It really is the engine behind the show. If you want to help us keep digging into these market disconnects, you can find us at buy me a coffee dot com slash fexingo. Luna: We appreciate it, because keeping the lights on lets us focus on the data rather than the ads. Lucas: Back to the data. The key here is the divergence between goods and services. Goods prices are effectively being dragged down by that energy slump. But services? They are still pricing in labor costs that haven't softened yet. Luna: So oil dropping to ninety dollars a barrel isn't hitting the price of a haircut or a hotel stay yet? Lucas: Not directly. Energy is only about seven percent of the CPI basket. The rest is shelter, healthcare, insurance, and food services. Those sectors have long contract cycles. A factory might adjust its input cost tomorrow, but your health insurance premium adjusts annually. Luna: That lag effect is crucial. It explains why the PCE price index also ticked up to one hundred thirty one point six despite the commodity selloff. Lucas: Precisely. And notice the core PCE was thirteen zero point five. The Fed watches that number closely because it strips out food and energy entirely. If they see energy dropping, they might feel comfortable holding rates, but they are terrified of that services component staying hot. Luna: Is there a specific area within services that is leading the charge right now? Or is it broad-based? Lucas: It is heavily concentrated in insurance and housing. Shelter makes up nearly a third of the index. Even if new rents stabilize, existing leases lock in those higher prices for months. It is a structural drag that won't vanish overnight. Luna: So we have falling raw materials clashing with rigid service contracts. Does that mean the Fed is stuck in no-man's-land? Lucas: I think they feel less stuck and more patient. Look at the ten-year breakeven inflation rate. It moved up slightly to two point three six percent. Markets aren't pricing in a deflationary crash; they are pricing in persistent, moderate inflation. Luna: Two point three six is right around their target range. So maybe they don't need to do anything drastic? Lucas: Correct. If the market believes inflation will stay near two and a half percent, the Fed doesn't have to panic-cut rates. They can wait for that services inflation to bleed out naturally. It is a slow burn, not an explosion. Luna: But what happens if oil keeps crashing? Doesn't that eventually force wages down? Lucas: That is the assumption. Lower energy costs should reduce transportation fees, which should lower grocery prices. But we aren't seeing that pass-through yet. Grocery prices are actually sticky because of supply chain bottlenecks elsewhere, not just fuel costs. Luna: So the transmission mechanism is broken. You have cheaper gas, but your milk bill stays the same. Lucas: Exactly. Retailers are absorbing some of that margin pressure, or they are facing other cost inputs like packaging and logistics. It breaks the simple model where lower oil equals lower inflation immediately. Luna: This feels like a lesson in patience for investors. Everyone wants the relief rally, but the data says wait. Lucas: And for businesses. If you are a manufacturer, your input costs are dropping. But your customers aren't lowering their price expectations yet. You are caught in the middle of a margin squeeze. Luna: Margin squeeze sounds painful. Are we seeing that in the earnings reports? Lucas: Yes. Look at the energy ETF, XLE. It is down almost two percent. Companies like Exxon and Chevron are trying to hold prices, but the volume is softening. They are trading revenue for market share, which hurts their bottom line. Luna: So the stock price reflects the future profit decline, even if the current inflation data looks okay. Lucas: Spot on. The market is forward-looking. It sees the oil glut coming. But the inflation data is backward-looking. It shows us what happened last month. That mismatch creates all the volatility we see in the headlines. Luna: It is frustrating for anyone trying to make sense of the news cycle. Lucas: It is. But if you strip away the noise and look at the core components, the picture is clearer. Inflation is sticky, not accelerating. Commodity prices are correcting, not collapsing. Luna: So the takeaway is: don't bet on a sudden deflationary burst, but don't fear hyperinflation either. Lucas: Exactly. It is a grind. A slow, boring grind toward equilibrium. And that boredom is probably good for the markets in the long run. Luna: Boring is better than volatile. I can live with that. Lucas: For now, yes. But watch that shelter index next month. If it starts to dip, then we might finally see the real impact of these commodity drops. Luna: One step at a time. Thanks for keeping us grounded in the actual numbers, Lucas. Lucas: Anytime. Let's see if that shelter data cooperates next week.