Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the Iran Conflict Is Reshaping Your Inflation Reality
Transcript
- Lucas: Luna, we've talked a lot about why inflation feels worse than the headline number. But there's a new layer to that story now, and it's coming from a place we haven't really focused on yet: the Iran conflict. Luna: You mean beyond just the headlines about oil prices spiking? Lucas: Exactly. There was a CNBC report out Friday that put a number on it: the average U.S. household is paying about $450 more on gas and energy directly because of the war. That's not pocket change. And it's not something the Fed's core inflation measures even capture. Luna: Right, because core CPI and core PCE strip out food and energy. So the Fed's preferred gauge is telling them one story, but households are living a different one. Lucas: Precisely. Core PCE came in at 3.3% annualized in April, which was exactly in line with expectations. But the headline PCE — which includes energy — moved up more. And that gap is where the pain is showing up. Luna: So the Fed can point to core inflation and say 'we're making progress,' while families are feeling something completely different at the pump and on their utility bills. Lucas: And that's creating what some economists are calling a 'double scar' effect. Consumers are still scarred from the 2021-2022 inflation spike, and now they're getting hit with this new energy shock on top of it. It's like the trauma doesn't get a chance to heal. Luna: Does the Fed acknowledge that? I mean, Kashkari was on CNBC this week saying the inflation fight takes priority and the labor market is 'in decent shape.' He didn't sound like someone worried about energy-driven inflation. Lucas: That's the thing — the Fed's tools are blunt instruments for this kind of shock. Raising interest rates doesn't lower the price of oil when the cause is a geopolitical conflict. And Goolsbee actually flagged this — he said energy inflation has been more persistent than expected. But what can the Fed really do? Luna: So it's not just about the numbers. It's about how people interpret them. If you're seeing gas prices stay high week after week, you start to expect that inflation will stay high too. And those expectations can become self-fulfilling. Lucas: That's the real risk. The University of Michigan's consumer sentiment survey has been showing a pickup in long-run inflation expectations. Not dramatically, but enough to get the Fed's attention. If that persists, it makes their job harder even if the actual data looks okay. Luna: And this time it's different from past oil shocks, right? Because in the 1970s, oil spikes were mostly demand-driven or supply disruptions from OPEC. Here, we have an active war involving a major producer, and it's not clear when or how it ends. Lucas: Right. The uncertainty itself is a kind of inflation. Companies hedge fuel costs, but eventually those higher costs get passed through. We're seeing it in airline fares, in shipping surcharges, even in some packaged goods that use petroleum-based inputs. It ripples through the economy. Luna: So what's the bottom line for listeners? Should they expect this to keep going, or is there some relief on the horizon? Lucas: I think the honest answer is: the path of energy prices is highly uncertain because it depends on the conflict. What I'd watch is the spread between headline and core inflation. If that spread widens further, it means the energy shock is deepening. And that will eventually force the Fed to talk about it more explicitly, even if they can't do much about it. Luna: And in the meantime, households are just left absorbing that extra $450 a year — or more if things escalate. Lucas: Exactly. And that's the part of the inflation story that doesn't get enough attention. The headline numbers can look manageable, but the lived experience for millions of people is still pretty raw. Luna: Yeah, it's a reminder that inflation isn't just an abstract economic concept. It shows up every time you fill up your car or pay your heating bill. Lucas: And that's exactly why we dig into these topics — to help make sense of what's actually happening in the real economy. If getting that clarity has been valuable to you, we hope you'll consider supporting the show. Luna: It keeps us ad-free and focused on the substance. You can chip in at buy me a coffee dot com slash fexingo. Lucas: Now, one other thing I want to flag: the broader market reaction. Look at gold — it's at $4,560, up again this week. And gold mining stocks, the GDX ETF, up over 5% in five days. That's a clear signal that investors are pricing in prolonged geopolitical risk and hedging against it. Luna: So the markets are already voting with their dollars that this inflation isn't going away quickly. Lucas: Right. When you see gold and energy stocks rallying while the broader indices like the S&P 500 are also hitting new highs — at 7,580 today — it's a split personality market. Risk-on in tech and growth, but also heavy hedging in commodities. That's not a recipe for stable inflation expectations. Luna: It feels like the Fed is stuck between a rock and a hard place. They don't want to hike into a supply shock, but they also can't ignore that inflation expectations are creeping up. Lucas: And that's the tension we'll be watching in the months ahead. For now, the data says core inflation is okay. The markets say risk is elevated. And households are saying it hurts. All three are true at the same time. Luna: Well, thanks for unpacking that, Lucas. It's a lot to digest, but it's important context. Lucas: Absolutely. We'll keep tracking it for you. Until next time.