Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Grocery Bill Isnt Matching Official CPI Numbers
Transcript
- Lucas: So the latest CPI number came out for April—headline index at 332.4, up about 0.6 percent from March. On paper, that's a pretty modest monthly gain. But consumer sentiment just hit a fresh record low last week, and surveys keep showing that most people think inflation is running way hotter than the official number. So what gives? Luna: Right—the gap between the data and the lived experience feels bigger than it has in years. And it's not just vibes. Let's talk about why. Lucas: Exactly. One of the biggest reasons is something called substitution bias. The CPI assumes that when the price of beef goes up, you'll switch to chicken. And to some extent, people do that. But the index weights things based on what people actually bought during the last survey period, not what they'd prefer to buy at current prices. Luna: So if you're a family that eats ground beef three times a week, and beef is up 8 percent year-over-year, the CPI's meat sub-index might only show a 3.2 percent increase because it's blending in cheaper proteins. Your actual grocery bill doesn't reflect that blend. Lucas: That's exactly the mechanism. And there's another layer: geometric weighting. The CPI doesn't just use a fixed basket—it mathematically assumes that when a price rises, consumers buy less of it, and it weights the index accordingly. So the official number is, by design, lower than what a household that keeps buying the same things would experience. Luna: Which is why the Fed prefers core PCE for policy—it's even more flexible in its weighting. Core PCE right now is at 2.6 percent, and the Fed's target is 2 percent. But your rent and your car insurance aren't in core PCE the way they show up in your bank account. Lucas: And that's where the disconnect really bites. The CPI does include rent and insurance, but it uses something called owners' equivalent rent for homeowners—basically imputing what your house would rent for. That number has been cooling, but actual rents for new leases in many cities are still climbing. So the index smooths out a pain point that hits you every month. Luna: Let's talk about a specific basket. Walk me through what a family earning $60,000 a year might see versus the CPI. Lucas: Sure. Take a family in the Midwest—they spend about 13 percent of their after-tax income on food at home. If beef, eggs, and dairy are up 6 to 8 percent annually, that's a real squeeze. CPI food at home is running around 2.4 percent year-over-year. The difference between 2.4 and 6 percent on that 13 percent slice of budget is about $250 a year in extra cost that the index doesn't capture for that family. Luna: And that's just food. Then you add in insurance—auto insurance premiums are up something like 15 percent over the past year. That's not in core CPI's 'services less housing' bucket the way you'd expect. And health insurance, which is measured differently in CPI, often lags behind actual premium increases. Lucas: Right. The Bureau of Labor Statistics measures health insurance in CPI based on retained earnings of insurers, not premiums. So when your premium goes up because costs are rising, the CPI might not even register it until months later, if at all. That's a huge blind spot. Luna: No wonder sentiment is at a record low. The official data says inflation is moderating, but your wallet tells a different story. And it's not just misleading—it has real policy consequences. The Fed looks at core PCE, sees 2.6, and thinks they're almost done. But the median voter is still getting hammered. Lucas: Which brings up a broader point: the Fed's mandate is maximum employment and stable prices. But 'stable prices' is defined by the core PCE index, not by the prices that matter most to households. There's a growing debate about whether the Fed should pay more attention to alternative measures, like the Dallas Fed's trimmed mean CPI or even real-time price tracking from credit card data. Luna: You know, it's funny—we spend so much time talking about these indices, and I think our listeners really appreciate the nuance. And it's exactly that kind of attention to detail that keeps this show going. We don't have ads, we're listener-supported, and a handful of people chip in monthly through Buy Me a Coffee—buy me a coffee dot com slash fexingo—and that's what funds this whole thing. Lucas: Yeah, it's a small group, but it makes a huge difference. If walking through the economy with us has made something click, that's the place. No pressure, just if it's useful. Luna: Alright, back to the numbers. So if the Fed is looking at the wrong gauge, what would happen if they started targeting a more consumer-relevant index? Lucas: Short-term, they'd probably have to keep rates higher for longer, because the real inflation picture is stickier. The ten-year breakeven inflation rate is at 2.40 percent, which suggests the bond market expects inflation to stay above target. If the Fed switched to a cpi like measure, they'd see inflation closer to 3 percent, and they'd have to act on it. Luna: Which would slow the economy more, maybe tip us into recession. So there's a reason they use core PCE—it's less volatile, and it gives them room to avoid over-tightening. But for the average person, that room comes at a cost. Lucas: Exactly. The index is designed for policy, not for your grocery list. And until someone builds a real-time cost of living index that captures what people actually buy, we're going to have this disconnect. The question is whether policymakers will eventually adjust their framework—or whether they'll keep saying 'inflation is moderating' while voters keep feeling the pinch. Luna: So the next time you see a headline saying inflation is down, look at your own receipt. That's your personal CPI. And it might tell a very different story. Lucas: Right. And that's what we'll keep tracking. Thanks for listening—we'll see you next time.