Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Inflation Gap Between What You Pay and What CPI Shows
Transcript
- Lucas: Luna, the CPI came in at 334.0 for May. That's up from 332.41 in April — a 0.5 percent monthly increase. But when I look at my own rent and insurance bills, it feels like prices are rising twice that fast. Luna: I know exactly what you mean. My car insurance went up 12 percent this year, yet CPI says auto insurance is only up about 6 percent annually. There's a gap. Lucas: That gap is the heart of this episode. The official CPI is a weighted average of thousands of items, but your personal consumption basket might be very different. If you spend a bigger share on rent and insurance — categories that are rising faster than the average — your personal inflation rate could be a point or two higher. Luna: So the headline number is accurate, it's just not accurate for me. Lucas: Exactly. And that's a big reason why consumer sentiment stays sour even as inflation cools. Now, I want to mention something quickly: if you find these conversations helpful, one way to keep the show ad-free and independent is to chip in a couple of dollars a month. It genuinely makes a difference — buy me a coffee dot com slash fexingo. Luna: Yeah, we really appreciate that. It helps us keep digging into these specific angles. Lucas: So back to the gap. The core PCE price index — the Fed's preferred gauge — came in at 130.1 for May, up from 129.67. That's a 0.3 percent monthly increase, still above the Fed's 2 percent annual target. And core PCE excludes food and energy, which are volatile. But it includes rent and medical services. Luna: Right, and rent is the biggest component. CPI's rent measure is still running around 0.4 percent monthly, which annualizes to nearly 5 percent. But many renters are seeing increases of 8 or 10 percent at lease renewal. Lucas: Because CPI measures rent for all tenants, including those with long-term leases who haven't renewed. So it's a lagging indicator. New rents are coming in much higher, but CPI smooths that out over time. Luna: So if you moved last year, your rent increase is not captured in CPI until the survey catches up. Lucas: Exactly. And then there's insurance. Auto insurance premiums have been rising at double-digit rates, driven by higher repair costs and more frequent claims. But CPI only captures a fraction of that because it's a small weight in the basket. Luna: Meanwhile, the ADP report today showed private payrolls added 98,000 in June, below expectations. If the labor market softens, maybe that will eventually cool service inflation. Lucas: That's the Fed's hope. But services inflation is sticky. The Fed's interest on reserve balances rate is at 3.65 percent, and the effective federal funds rate is 3.63. They've held steady for months, waiting for more evidence that inflation is sustainably heading to 2 percent. Luna: But if core PCE is still at 0.3 percent month over month, that annualizes to about 3.6 percent. Still above target. Lucas: Right. So the gap between official CPI and personal experience is likely to persist. And that creates a disconnect in how people feel about the economy. Consumer confidence surveys show people are still pessimistic even though GDP and employment are strong. Luna: It's the 'vibecession' all over again. But this time, there's a real data reason behind it. Lucas: Yeah. The 10-year breakeven inflation rate, which is a market-based measure of expected inflation over the next decade, is at 2.24 percent. That's up from 2.22 the day before. Markets are pricing in inflation staying above 2 percent for years. Luna: So even the bond market doesn't believe the Fed will get back to 2 percent anytime soon. Lucas: Not without a recession, at least. And the Fed is trying to avoid that. They're walking a tightrope. Luna: Let's talk about another category that feels disconnected: grocery prices. CPI for food at home is up about 1.5 percent year over year. But I see headlines about shrinkflation and higher margins. Lucas: We did an episode on grocery margins a while back. The reality is that producers are keeping prices high even as input costs moderate. That's corporate profit-led inflation. It's not captured well in CPI because CPI measures price levels, not margins. Luna: Right. So the gap isn't just about weighting; it's about what each index actually measures. Lucas: Exactly. CPI measures a fixed basket of goods. PCE adjusts the basket as consumption patterns change. So PCE tends to be lower because it captures substitution — if beef gets expensive, PCE assumes you switch to chicken. Luna: That makes sense. But my personal inflation rate might be higher because I don't want to switch to chicken. Lucas: That's the key insight. Your personal basket is not the average. If you're a renter, drive a car, and eat a lot of protein, your inflation rate could be 1 or 2 percentage points above the official number. Luna: So what can listeners do with this information? Besides feeling frustrated. Lucas: First, understand that the official numbers are useful for macro policy, but not for your personal budget. Second, track your own spending categories. If your rent is 40 percent of your income, your inflation is driven by rent. Third, use that knowledge to negotiate — shop around for insurance, ask for a rent reduction if the market softens. Luna: And maybe expect the Fed to keep rates higher for longer because they're looking at a different inflation picture than you are. Lucas: Exactly. The fed funds rate is at 3.63 percent. That's still restrictive. But if core PCE stays above 3 percent annualized, they won't cut soon. Luna: So the gap between your inflation and the official data might keep the Fed on hold, which means your borrowing costs stay high too. Lucas: That's the irony. The very gap that makes you feel like inflation is still bad is also the reason the Fed is reluctant to cut rates, which keeps mortgage and car loan rates high. Luna: It's a feedback loop. Lucas: Yeah. And breaking out of it requires either a big slowdown in the job market — which we might be seeing with the ADP miss — or a supply-side boost that brings down shelter and insurance costs. Luna: Neither of those is quick. Lucas: No. So for now, the gap persists. And the best you can do is understand it and factor it into your financial decisions. Luna: That's a good place to leave it. Thanks, Lucas.