Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Wholesale Prices Are Screaming About Sticky Inflation
Transcript
- Lucas: If you only looked at the consumer inflation numbers this morning, you might have breathed a sigh of relief. But the real story was hiding in plain sight in the producer price index. Wholesale prices jumped six point three percent year-over-year in September. That is the biggest annual gain we have seen since early twenty twenty-two. Luna: Six point three percent? That feels aggressive for a time when everyone thinks the Fed is about to pivot. Isn't that mostly energy and food? Lucas: It is tempting to dismiss it as volatile commodities, but the core reading tells a different story. When you strip out food and energy, wholesale prices still climbed. That means manufacturers and wholesalers are absorbing higher input costs and passing them up the chain. The pressure isn't gone; it is just sitting in the warehouse right now. Luna: So the consumer hasn't felt it yet because retailers are eating the margin squeeze to keep shelf prices stable. Lucas: Exactly. And that buffer has a limit. Retailers have been operating on thin margins for two years. They cannot absorb a six percent input cost hike forever without raising prices or cutting quality. This is the lag effect where upstream inflation becomes downstream inflation. Luna: But wait, the broader market didn't react much. The S&P five hundred dropped one point nine percent, sure, but the Dow actually gained ground. Why isn't this breaking the narrative? Lucas: Because investors are distracted by the noise around the October meeting. Everyone expects the Fed to hold rates steady. Kevin Warsh and a few hawks are talking about surprises, but the consensus is patience. The market is pricing in stability, not crisis. Luna: Stability is good until it isn't. If those wholesale costs start hitting grocery bills next quarter, will the Fed be forced to act? Lucas: That is the million-dollar question. Let's look at the budget deficit for context. The U.S. budget deficit swelled to almost two trillion dollars for fiscal twenty twenty-six. That is up twelve percent in a single year. Luna: Two trillion. That level of government spending usually fuels demand. Does that explain the sticky prices? Lucas: It contributes to it. High deficits mean the Treasury is issuing more debt, which keeps long-term yields elevated even if short-term rates stay put. The ten-year yield is sitting around five point one percent. You can't have cheap money policy with expensive government borrowing. Luna: Right, so the fiscal side is loose while the monetary side is tight. That mismatch creates exactly this kind of friction in the supply chain. Lucas: Precisely. And look at the labor market data from JOLTS. Job openings dropped to seven thousand and seventy-nine thousand in August. That is down from over seven point three million. The cooling labor market should theoretically reduce wage pressure, but wages are still creeping up. Luna: Average hourly earnings for private workers hit thirty-seven dollars and eighty cents in September. Up again. So labor costs are rising even as hiring slows. Lucas: It suggests structural tightness rather than cyclical slack. Employers are paying more to retain people because the talent pool is shrinking due to demographics. That adds to the production cost that ends up in the wholesale index. Luna: This feels like a classic case of stubborn inflation that won't go away just because the Fed wants it to. What do you think the PCE says about this? Lucas: The personal consumption expenditures price index rose to one thirty-one point six in August. Core PCE is at one thirty point five. Both are ticking up slightly. The Fed watches PCE closely, and seeing it drift higher despite high rates is a headache for policymakers. Luna: So they are stuck between a rock and a hard place. Cut rates and risk reigniting inflation, or hold rates and let the recessionary forces build. Lucas: That is the trap. And remember, the unemployment rate ticked up to four point two percent in September. It is still low historically, but the trend is upward. The economy is slowing, but prices aren't following suit. Luna: Which makes the current rate environment feel punitive for businesses that are already dealing with these wholesale spikes. Margins are getting crushed from both sides. Lucas: Let's take a quick pause here. If walking through the economy with us has made something click, especially when tracking these shifting macro trends, we rely on listener support to keep the show ad-free and independent. If you want to help us keep digging into these numbers, you can find us at buy me a coffee dot com slash fexingo. It really helps sustain the research behind these daily conversations. Luna: We appreciate every bit of support. It allows us to keep asking the questions the headlines miss. Back to the data. Lucas: Thanks for that. Now, let's look at the bond market reaction. The ten-year yield dropped two point seven percent over the last five days to five point one percent. The thirty-year yield fell even harder. Luna: Yields falling while inflation whispers are rising? That usually signals fear, not confidence. Is the market pricing in a recession? Lucas: Partially. Bond traders are hedging against growth slowdown. But they are also betting that the Fed will eventually cut rates to support the economy. The disconnect is between short-term rate expectations and long-term inflation risks. Luna: So the curve is flattening because the front end is sticky with rates while the back end drops on growth fears. Lucas: Exactly. And this brings us back to the wholesale prices. If those six point three percent gains persist into Q4, the Fed will have less room to cut. They might even have to talk hawkish again to anchor expectations. Luna: That would be a shock to the system. Markets are currently pricing in a very smooth landing. A hawkish surprise could trigger a sharper correction. Lucas: Look at the Nasdaq. It dropped four point one percent over the last five days. Tech stocks are sensitive to discount rates. If yields don't fall further, or if inflation stays sticky, tech valuations face pressure. Luna: Small caps are down too. The Russell two thousand is off two point six percent. Those companies rely heavily on credit markets. Higher financing costs plus input costs is a double whammy for them. Lucas: And we haven't even touched on the global picture. The IMF issued a warning about global debt levels that the U.S. Treasury dismissed as messy forecasting. But high debt everywhere limits monetary flexibility globally. Luna: When the whole world is leveraged up, any shock to inflation becomes systemic. There is no safe harbor right now. Lucas: True. But let's focus on the domestic signal. The initial jobless claims ticked up to one hundred ninety-nine thousand. It is a small move, but combined with the declining job openings, it shows the labor market is truly normalizing. Luna: Normalizing sounds neutral, but for asset prices, normalization means lower growth multiples. Investors need to adjust their mental models for a slower, sticker economy. Lucas: Which is why I keep coming back to that PPI number. It is the leading indicator. Consumer prices are the lagging indicator. By the time CPI shows the full impact of those wholesale hikes, it will be months later. Luna: So we are looking at potentially hotter inflation prints in November and December unless supply chains suddenly improve. Lucas: Unless. But given the geopolitical tensions and the fiscal deficit, improvement seems unlikely. The path of least resistance is higher prices for longer. Luna: It makes the Fed's decision in October even more critical. Holding rates sends a message of caution, but does it send enough? Lucas: I think the Fed knows they are behind the curve. But admitting it publicly would spook markets. So they will likely hold, use ambiguous language, and hope the data cooperates. Luna: Ambiguity is a powerful tool, but it doesn't fix broken supply chains or reduce government spending. The fundamental pressures remain. Lucas: They do. And as we head into the end of the year, businesses will be setting budgets based on these inflated input costs. Once those contracts are signed, prices stick. Luna: So the question for listeners isn't just about interest rates anymore. It is about planning for a cost structure that has permanently shifted upward. Lucas: Exactly. The era of zero percent inflation is over. We are in a new regime where volatility is baked into the baseline. Luna: A sobering thought as we watch the markets close out the week. Lucas: It is. And the best defense is awareness. Keep watching those wholesale numbers, because they are the canary in the coal mine for the rest of the year.