Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Productivity Mirage In Stagflation
Transcript
- Lucas: Look at the latest numbers from October twenty-third, and there is a quiet contradiction sitting right under the surface of the S&P five hundred, which is hovering around seven thousand six hundred twenty-four points. We have companies reporting record margins, yet the core consumer price index is still sticky at three hundred thirty-eight, up slightly from September, while real GDP growth has slowed to just two point two percent annualized. Luna: So you are saying the economy is running hot for shareholders but cold for everyone else trying to buy groceries? Lucas: Exactly. It is the classic stagflation trap, but with a modern twist. Historically, when we saw this mix of high inflation and slow growth, it was usually driven by an external shock like oil or food prices. But today, the driver is internal. Businesses are finding ways to raise prices without hiring more people, effectively decoupling revenue growth from labor demand. Luna: That sounds like a recipe for long-term social friction if wages don't catch up. Lucas: It is exactly that. Let us look at the job openings data from JOLTS. They dropped to seven thousand seventy-nine thousand in August, down from over seven thousand three hundred. At the same time, initial jobless claims are near historic lows, sitting at one hundred ninety-four thousand. This means firms are not firing, but they are also not hiring. They are surviving on existing staff while squeezing consumers through higher prices. Luna: And the Fed is watching all of this, trying to figure out if they need to hike rates again or if the slowdown is already doing the work. Lucas: Right. And here is where it gets interesting. The ten-year breakeven inflation rate ticked up to two point three four percent today. That tells us the market expects inflation to remain persistent, even as growth stalls. If you were a CFO in October twenty-sixth, you would be looking at your cost structure and realizing that labor is expensive, so you invest in software instead of salaries. Luna: But does replacing humans with algorithms actually solve the productivity problem, or does it just delay it? Lucas: It solves the short-term margin problem. We have seen this pattern before in the late seventies, but the mechanism is different. Back then, unions forced wages up, which drove costs up. Now, it is about operational efficiency. Companies are using AI and automation to maintain output levels with fewer employees, which keeps unit costs down for them, but those savings do not trickle down to lower consumer prices because demand is still strong enough to support higher margins. Luna: So consumers are paying more for less human interaction, which feels like a downgrade in service quality. Lucas: Precisely. You see it in the services sector. Car buyers are demanding better tech and lower prices, but automakers are struggling to deliver both. They are raising prices to cover the cost of new software integration, even as they cut back on traditional manufacturing roles. It is a structural shift in how value is created and captured. Luna: This makes the housing market warning signs even more concerning, since construction relies heavily on stable labor costs. Lucas: That is a great point. Housing is flashing warnings because builders cannot pass on their rising costs quickly enough. When you combine sticky services inflation with a softening goods sector, you get this uneven pressure across the economy. The average hourly earnings in the private sector rose to thirty-seven dollars eighty cents in September, but that gain is being eaten away by the core CPI increase. Luna: So real wages are basically flatlining for the average worker. Lucas: Flatlining is generous. For many, they are shrinking. When you look at the nonfarm payrolls, the number is barely moving, stuck around one hundred fifty-nine thousand. The labor market is not collapsing, but it is not expanding either. It is in a holding pattern that benefits capital owners over labor providers. Luna: I wonder if this will force the FOMC to make a mistake in the next meeting. Lucas: They might. If they keep rates high to fight the remaining inflation, they could push the real GDP growth below zero. But if they cut too early, inflation expectations could unanchor, especially with that breakeven rate creeping up. It is a tightrope walk. Luna: Do you think investors are pricing in this risk, or are they still chasing the AI narrative blindly? Lucas: Mostly the latter. The NASDAQ is down one point eight percent over the last five days, showing some nervousness, but the broader market is still elevated. Investors are betting that technology will eventually solve the productivity puzzle, but they are ignoring the lag time. It takes years for new tech to fully integrate into daily operations and show up in the GDP numbers. Luna: So we are in the valley of disappointment for now. Lucas: We are. And during that valley, companies will continue to squeeze margins and prices will remain stubborn. The unemployment rate is at four point two percent, which looks fine on paper, but it hides the fact that quality of jobs may be deteriorating. People are staying employed, but they are not getting richer. Luna: It reminds me of the UK situation, where inflation jumped to three point five percent recently, trapping their central bank. Lucas: The UK is a cautionary tale. They faced similar supply shocks and wage pressures. If the US follows a similar path, we could see a prolonged period of sub-par growth with above-target inflation. The key difference is our energy independence, which helps, but it does not fix the structural issue of labor productivity. Luna: What can a regular person do to protect themselves financially in this environment? Lucas: Diversification beyond just stocks. Since cash loses value to inflation and bonds are hurt by rate uncertainty, alternative assets like gold have been volatile, dropping three point six percent recently, but they still serve as a hedge. The best move is probably investing in skills that complement automation, rather than competing against it. Luna: Adapting your own career path to avoid the automation trap. Lucas: Exactly. Human judgment and creativity are harder to automate than routine tasks. Those skills will command a premium in a labor-scarce, high-tech economy. Luna: If walking through the economy with us has made something click, remember that we deliberately run no ads on these shows. If you want to support that choice, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: Your support keeps the research deep and the commentary honest. Thank you for being part of the conversation. Luna: Back to the data, because the story isn't over yet. Lucas: Let us talk about the PCE price index, which the Fed prefers. It is at one hundred thirty-one point six, up from one hundred thirty-one point one seven. Core PCE is at one hundred thirty point five. These numbers are softer than CPI, but they are still positive. The Fed needs them to go negative to hit their two percent target. Luna: So the target is elusive, and the tools are blunt. Lucas: Blunt and potentially ineffective. Raising rates hurts borrowers, but it doesn't directly address the supply-side constraints or the corporate pricing behavior we discussed. It is a sledgehammer approach to a scalpel problem. Luna: Does that mean we should expect more volatility in the bond market? Lucas: Likely. The ten-year Treasury yield is sensitive to these mixed signals. If growth slows faster than inflation falls, yields could drop, but if inflation reignites, they could spike. The bond market is currently pricing in a soft landing, but the odds are shifting. Luna: Shifting toward what, exactly? Lucas: Toward a harder landing for workers, even if the macro numbers look stable. The divergence between corporate success and household struggle is widening. That is the real story of October twenty-sixth. Luna: And it will only widen until wages finally rise or demand finally breaks. Lucas: One of those two events is coming. The question is which one happens first, and how much damage it causes along the way. Luna: A stark reminder that economic indicators are just shadows of the human experience behind them. Lucas: They are. And until we align profit motives with wage growth, we will keep dancing around this stagflation edge. Luna: I suppose we will keep watching the data closely to see who blinks first. Lucas: We will. And we will let you know what we find next week.