Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Services Inflation Feels Stubborn in 2026
Transcript
- Lucas: If you look at the headline CPI number released back on August first, it sits at 334.1, which is up slightly from the previous reading. But if you strip out food and energy to look at Core CPI, that figure is holding stubbornly high at 337.8. This divergence tells us that while the volatility of gas and groceries has settled, the underlying machinery of daily life is still getting more expensive. Luna: Right, and that gap between headline and core is where most people feel the heat because they can’t just choose not to buy healthcare or fix their car. Lucas: Exactly. And we are seeing this play out right now as we wrap up September 2026. The S&P 500 is trading around 7,769, showing some recent momentum, but consumer sentiment reports from Goldman Sachs suggest that happiness is down despite a solid economy. People are looking at their bank accounts and wondering why the numbers don't match the news cycles. Luna: It’s that disconnect between macro stability and micro reality. If walking through the economy with us has made something click, and you want to keep these deep dives ad-free, check out our support page at buy me a coffee dot com slash fexingo. Lucas: Thanks for the support, it really keeps the research sharp. Let’s get back to that Core CPI of 337.8. The reason this number sticks is largely structural: services are labor-intensive. Unlike a factory that can automate production or a farmer who can weather a bad season, services require human hours. Luna: So when wages rise to attract workers, those costs pass directly to the consumer without the buffer of inventory liquidation. Lucas: Precisely. Take the housing market, which is a massive component of the services index. Even though home price appreciation has cooled, rent and shelter costs remain elevated. Landlords aren’t lowering rents just because mortgage rates fluctuated; they have fixed costs too. The Fed Funds effective rate is currently sitting at 3.63 percent, which is relatively flat, meaning there’s no sudden shock to reset expectations here. Luna: But isn’t the issue less about the rate itself and more about the availability of supply? We saw headlines recently about transport companies sounding alarms on fuel prices, which ripples through logistics. Lucas: That’s a great point about the supply chain friction. While fuel costs are volatile, the deeper drag comes from sectors like professional services and hospitality. Consider France’s wine production nearing a seventy-year low. That’s a supply shock that drives up prices for imported goods, but more importantly, it signals how climate and labor shortages are compounding in ways that simple monetary policy can’t easily fix. Luna: So we’re seeing a perfect storm where labor costs stay high, supply chains face localized shocks, and the Fed is waiting for the lag effects of rate changes to fully transmit through the service sector. Lucas: Yes, and the transmission is slow. Look at the ten-year breakeven inflation rate, which is at 2.34 percent as of yesterday. Markets are pricing in a persistent, slightly above-target inflation environment. Investors know that while goods inflation might fall, services inflation tends to be sticky because you can’t store a haircut or a medical consultation in a warehouse. Luna: It feels like the 'invisible tax' we talked about last week is now a permanent feature of the budget rather than a temporary spike. Lucas: I’d argue it’s becoming a structural shift. When you look at the PCE price index, which the Federal Reserve prefers, it’s at 131.7. Core PCE is 130.7. These measures include imputed owner-occupied rent and other adjustments that make them smoother than CPI. Yet even by Fed standards, the trend isn’t collapsing toward two percent overnight. It’s grinding sideways. Luna: And that grinding motion is what erodes purchasing power over time, even if the year-over-year percentage change looks manageable. Lucas: Absolutely. A three percent annualized increase sounds small until you compound it over five years. That’s why consumer sentiment is so fragile. Goldman Sachs noted that lower happiness is driving sentiment down. People aren’t necessarily angry about the CPI print; they’re exhausted by the uncertainty of whether next month’s bills will be higher. Luna: Do you think the Bank of England’s decision to leave rates unchanged, mirroring the Fed’s stance, offers any clue for global inflation trends? Lucas: It reinforces the idea that central banks globally are in a holding pattern. They see inflation cooling but not falling fast enough to cut rates aggressively. The BoE defying the urge to hike further shows caution, but also a lack of confidence that inflation is defeated. It’s a wait and see approach that keeps borrowing costs high for businesses trying to expand service capacity. Luna: High borrowing costs mean fewer new competitors entering markets like home repair or specialized healthcare, which reduces competitive pressure on prices. Lucas: Spot on. Market consolidation favors incumbents who can raise prices without losing customers. Meanwhile, the NASDAQ is up nearly five percent over the last five days, driven largely by tech giants. But those gains don’t translate to lower grocery bills or cheaper insurance premiums for the average household. Luna: There’s a growing disconnect between asset owners and wage earners. If your wealth is tied to stocks, you feel fine. If your wealth is tied to your paycheck, you feel squeezed. Lucas: That’s the polarization of 2026. The Dow is at 51,888, showing steady growth, but the Russell 2000, which represents smaller domestic companies, is only up one point two percent. Small businesses are the backbone of services employment. Their sluggish performance suggests that the labor market isn’t expanding as dynamically as we might hope. Luna: So when those small businesses struggle to grow, they can’t offer the volume discounts or efficiency gains that usually drive prices down. Lucas: Correct. And we’re seeing this in the gold markets too. Gold is trading near 4,392 dollars an ounce, and gold miners like those in the GDX ETF are up nearly five percent. Investors are hedging against persistent inflation and currency debasement. They don’t trust that fiat money will hold its value steadily in the service-heavy economy we live in. Luna: It’s a vote of no confidence in the current monetary framework’s ability to tame service-sector inflation without causing a recession. Lucas: Or perhaps a realization that some inflation is necessary to maintain wage growth. If wages didn’t rise, we wouldn’t have the labor shortages that drive up service prices. It’s a trade-off. We’re choosing higher prices in exchange for a tighter labor market where unemployment remains low. Luna: But is that trade-off sustainable if productivity doesn’t improve? We’re paying more for the same amount of service hours. Lucas: That’s the critical question. Unless technology can augment service delivery—like AI in legal or medical diagnostics—the cost of those services will continue to outpace general inflation. Productivity in services has historically been hard to boost compared to manufacturing. Luna: So the solution isn’t just monetary policy; it’s technological adoption across the entire service sector, which takes decades, not quarters. Lucas: Exactly. And in the meantime, households need to adjust their budgets. Expecting inflation to vanish completely is unrealistic. Instead, we should anticipate a new baseline where services cost more relative to goods. Luna: That requires a shift in mindset from saving for short-term dips to planning for long-term structural shifts in cost allocation. Lucas: Right. You focus your savings on assets that hedge against inflation, like Treasury bonds or dividend-paying stocks, while accepting that your discretionary spending on services will likely creep up. Luna: It’s pragmatic adaptation rather than hopeful waiting. Do you think Japan’s recent market flip after a rate hike offers a template for how we might navigate this? Lucas: Japan is an interesting case study because they’ve battled deflation for decades. Their move to raise rates was cautious, aiming to normalize without breaking the recovery. For us, the lesson is that central banks are learning to manage expectations carefully. They don’t want to shock the system. Luna: Which means we shouldn’t expect aggressive cuts or hikes either. Just a steady, boring grind that slowly reshapes the cost landscape. Lucas: Boring is good for markets, but boring is frustrating for consumers trying to plan their lives. The key is understanding that the 'new normal' includes higher service costs. Luna: And recognizing that when you pay for a service, you’re partly paying for the worker’s need to survive in this same inflationary environment. Lucas: That’s a powerful way to frame it. It’s not just markup; it’s wage dynamics playing out in real-time. So as we close out September, keep an eye on the Core CPI and your own service expenditures. Are they rising faster than your income? That’s the metric that matters. Luna: Because if they aren’t, you’re effectively getting richer even if the headline numbers look scary. Lucas: Exactly. It’s personal finance meets macroeconomics. The big picture sets the stage, but your budget is the final script. What part of your service bill has jumped the most this year?