Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Inflation Gap Between Your Portfolio and Your Wallet
Transcript
- Lucas: So we hit episode 100 today, and I want to talk about something that's been bugging me for a while — the gap between the inflation you feel in your portfolio versus the inflation you feel at the checkout. Luna: That's a good one. Because if you look at the S&P 500 near 7,500, gold at $4,134, you'd think inflation is tame. But CPI is still at 334.0, up 0.5 percent from May. Lucas: Exactly. The financial economy is basically saying 'inflation is over.' The real economy is saying 'not so fast.' And the Fed is caught in between. They cut rates once in March, then paused, and now the fed funds rate is stuck at 3.63 percent. Luna: With core PCE still at 130.1, that's above their 2 percent target if you annualize it. So no wonder they're on hold. Lucas: Right. But here's the disconnect — the asset inflation we've seen in stocks and gold is partly a function of people fleeing cash because they don't trust the purchasing power. So the same CPI that's still elevated is also driving people into assets, which pushes those prices up. Luna: It's almost like a circular feedback loop. Higher CPI pushes money into assets, asset inflation makes people feel wealthier, and that wealth effect keeps consumer demand up, which keeps CPI sticky. Lucas: Bingo. And the June jobs report only complicates this. We added just 57,000 payrolls — that's weak by any standard. Unemployment ticked up to 4.2 percent. The labor market is clearly cooling. Luna: But wages are still growing around 4 percent year-over-year. So labor costs for service businesses haven't fallen. That's one reason service inflation is sticky. Lucas: Let's zoom in on that. The core PCE services ex-housing — what the Fed watches closely — is still running above 3.5 percent annualized. So even though goods inflation has basically disappeared, services are the anchor. Luna: And that's what hits consumers directly. You can't arbitrage a haircut or a car repair. You have to pay the local price. Lucas: Meanwhile, your 401k might be up 10 percent this year. So you feel richer on paper, but your real spending power is getting squeezed. That's the two-speed economy I keep coming back to. Luna: It's also why gold is at $4,134. People are hedging against exactly this — they see the disconnect and they want something that holds value regardless of what the CPI says. Lucas: And the 10-year breakeven inflation rate is only 2.25 percent. So the bond market is basically saying 'we believe the Fed will win.' But the gold market is saying 'we're not so sure.' Luna: Which one do you trust more? Lucas: I think both are right in their own domain. Bonds reflect the disinflation in goods and the impact of rate hikes. Gold reflects the long-term erosion of purchasing power from years of money printing. They measure different things. Luna: So for the average listener — someone who's not a macro trader — what's the takeaway? Lucas: I'd say don't look at any single number. Look at the gap. If your portfolio is up but your rent is up too, your real wealth might not be growing as fast as you think. And if you're in cash, you're losing purchasing power at maybe 2-3 percent a year, even with rates at 3.63 percent. Luna: That's actually a good point — after taxes and inflation, a high-yield savings account might be yielding negative real returns for some people. Lucas: Exactly. And that's why we keep doing this show — to help people see through the headlines. And honestly, the fact that we can do it without ads, without sponsors, is thanks to listeners who chip in through buy me a coffee dot com slash fexingo. It's a small group, but it makes this possible. Luna: Yeah, it really does. And it keeps us free to follow the data wherever it leads, without worrying about pleasing advertisers. Lucas: So back to that two-speed economy — I think the big question for the second half of 2026 is whether the labor market weakening will eventually pull service inflation down. The June payrolls number suggests it might be starting. Luna: But the participation rate falling to its lowest outside of COVID is a wildcard. Fewer people looking for work means less slack, which could keep wages up. Lucas: Right. So the Fed is in a tough spot. They don't want to cut too early and re-ignite inflation, but they don't want to stay high and crush the labor market. And the data is sending mixed signals. Luna: What would it take for them to cut again? Another month of sub-100k payrolls and a clear drop in core PCE? Lucas: Probably. But the market is already pricing in a cut by September. The fed funds futures see about a 60 percent chance. So the bond market is more dovish than the Fed's rhetoric. Luna: Which is interesting because if they do cut, gold might go even higher. And that would just reinforce the narrative that inflation isn't dead. Lucas: Exactly. It's a paradox. The very action that would help the labor market could also undermine confidence in the inflation fight. That's why I think the Fed will wait until they see a sustained drop in service inflation, not just goods. Luna: So for listeners, the practical advice might be: don't assume inflation is over just because your stocks are up. And maybe consider hedging a bit — whether that's through I bonds, commodities, or just being mindful of your spending mix. Lucas: Good summary. And as always, we'll keep tracking these numbers. Next week, I want to look at the ECB — Lagarde left the door open to an early exit, and with French politics in flux, that could have ripple effects on the dollar and on our import prices. Luna: Sounds like a plan. And for anyone who wants to support the show and keep it ad-free, you know where to find us. Lucas: buy me a coffee dot com slash fexingo. Seriously, it makes a difference. Okay, that's it for episode 100. See you next time.