Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Services Inflation Outpaces Goods in Late 2026
Transcript
- Lucas: Look at the September CPI print, which came in at 336.3, up slightly from August. But if you dig into the breakdown, the real story isn't the headline number—it's the divergence between goods and services. For months, we've watched things like used cars, furniture, and even new electronics start to normalize as supply chains fully healed. But services? That line on the chart is still climbing. Luna: Right, because goods are just boxes that get shipped faster now. Services are people, and people cost money. When wages go up, those costs don't disappear—they get passed directly to the consumer. Lucas: Exactly. And here is the concrete detail most people miss: Core CPI, which excludes food and energy, hit 338.9 last month. That means the underlying pressure is actually higher than the headline suggests. We are seeing a structural shift where the economy has effectively bifurcated. You have manufacturing sectors dealing with excess capacity and lower prices, while the services sector, which employs about eighty percent of the workforce, is locked in a tight labor market that keeps pushing costs upward. Luna: It feels like we're paying for convenience and expertise more than ever. Think about when was the last time you got a haircut, or paid a consultant, without seeing a price hike? Lucas: Or a lawyer. Or an accountant. Let's take healthcare as the anchor example. Healthcare services inflation has been running significantly hotter than general inflation for years. Why? Because it is intensely labor-driven. You cannot automate away the need for nurses, specialists, or hospital administrators. And with jobless claims near their lowest levels since the nineteen sixties, employers are competing fiercely for talent, which drives wages up, which drives service prices up. It is a self-reinforcing loop. Luna: So the Fed is trying to cool this down by raising rates, but they can't really raise the price of a nurse's salary without breaking something else in the economy. Lucas: Precisely. And that is why the Fed Funds rate, currently sitting at three point seven five percent, feels like it's hitting the brakes on the wrong engine. Higher interest rates make borrowing expensive for buying houses or expanding factories—those are capital-intensive activities. But they don't directly stop a hospital from needing to pay its staff more to retain them. This creates a policy mismatch. The central bank is fighting a services-inflation war with a goods-deflation tool. Luna: That explains why the VIX has been relatively calm despite the hawkish tone. The market knows the hard assets are stabilizing, even if my wallet doesn't feel it. Lucas: Well, the VIX is calm because the broader S&P 500 is holding up, driven by tech giants who benefit from digital efficiency. But for everyday consumers, the disconnect is palpable. Look at the ten-year breakeven inflation rate, which ticked up to two point three seven percent yesterday. Markets are pricing in that inflation will remain stickier than the Fed wants, specifically because of these service-sector dynamics. Luna: So if I'm planning my budget for the rest of the year, I should assume my utility bills, insurance premiums, and maybe even my childcare costs are going to keep creeping up? Lucas: Yes, and that is the trap. People see news headlines about gas prices dropping or smartphone prices falling, and they think inflation is defeated. But those are volatile or highly competitive segments. Insurance premiums, for instance, have surged because of climate risks and repair costs. Childcare costs are skyrocketing because there is a shortage of workers willing to do the job at current wages. These are not cyclical dips; they are structural shifts in the cost base of our society. Luna: It’s almost like we’ve moved from an era of cheap goods to an era of expensive care. There is a moral dimension to that shift, isn't there? Lucas: There absolutely is. When basic services become unaffordable, social mobility slows down. If education and healthcare continue to outpace wage growth for the middle class, you end up with a polarized economy where only the wealthy can access quality services easily. This isn't just a macroeconomic footnote; it's a political time bomb, especially with midterm elections looming and approval ratings on the economy hitting all-time lows. Luna: I think we should pause here for a moment. If walking through the economy with us has made something click, we deliberately don't run 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: Thanks for keeping the signal to noise ratio high. Now, back to the mechanics of this divide. Let's talk about housing, because that is the biggest component of your monthly expenses. The headline says housing is flashing warning signs, but what does that actually mean for the inflation number? Luna: It means rents are still sticky. Even if home prices cool, the cost of renting stays high because landlords have to cover their mortgage interest, which is still elevated given the current rate environment. Lucas: Correct. And the CPI measures shelter costs using a lagged metric called owners' equivalent rent. So even if you sell your house today, your 'rent' contribution to inflation reflects what similar homes were renting for six months ago. With the Fed Funds rate flat at three point eight eight percent recently, we aren't seeing a rapid drop in mortgage rates that would free up inventory. This keeps shelter costs propped up, adding another layer of stickiness to the Core PCE, which sat at one thirty point five in August. Luna: So the data is telling us that the 'soft landing' might be soft on paper, but hard on the ground for anyone renting or buying. Lucas: Exactly. And this brings us to the gold market, which crashed five percent over the last week. Gold dropped to four thousand forty-five dollars. Investors are rotating out of safe havens because they believe the Fed's tightening cycle will eventually tame these service inflation pressures. But I am skeptical that rate hikes alone will fix the structural labor shortages in healthcare and education. Luna: Unless the government intervenes to increase the supply of workers—through immigration reform or vocational training—the wage spiral in services will continue regardless of what the Fed does. Lucas: That is the hard truth. Monetary policy is blunt. It can slow demand, but it cannot create supply. If there are not enough nurses, raising interest rates won't conjure more nurses. It will just make it harder for hospitals to borrow money to build new wings. So we are left with a situation where inflation is being managed by suppressing overall demand, rather than solving the specific cost drivers in the services sector. Luna: Which means consumers have to absorb the pain. Your discretionary spending gets cut first, so you stop buying new phones, but you still have to pay the doctor. Lucas: Right. And that is why the retail sales data looks surprisingly resilient. People are cutting back on big-ticket items, but essential services remain non-negotiable. The economy is becoming more efficient at producing widgets, but less efficient at producing care. That efficiency gap is what defines the late twenty twenty-six economic landscape. Luna: It makes you wonder if 'inflation' is even the right word anymore. Maybe it's just 'repricing' of the service economy. Lucas: Repricing is a nice euphemism for losing purchasing power. But you are onto something. The dollar hasn't necessarily changed value; the relative scarcity of human labor has increased. As long as the population ages and requires more care, the cost of that care must rise. It is a demographic inevitability, not just a monetary phenomenon. Luna: So for the listener watching their portfolio, the advice is to expect higher volatility in service-heavy sectors, even if the broader market seems stable. Lucas: Precisely. And keep an eye on the JOLTS report and unemployment claims. As long as those numbers stay tight, services inflation will refuse to budge. The Fed is playing catch-up with a moving target. The question for the next quarter is whether they will keep hiking until the services sector breaks, or if they will accept a higher floor for inflation. Luna: A higher floor sounds dangerous for fixed-income investors. If yields stay elevated, bonds become attractive again, but stocks might struggle with the cost of capital. Lucas: True. But remember, small caps, tracked by the Russell twenty thousand, are up two point three percent recently. They are sensitive to domestic demand. If services drive domestic consumption, small caps might actually benefit from this specific type of inflation, unlike the mega-cap tech firms that rely on global supply chains. Luna: Interesting pivot. So the winners of this inflation regime might be the local businesses providing services, not the global retailers. Lucas: That is a very plausible thesis. Local service providers have pricing power because they cannot be outsourced. A haircut, a repair, a consultation—these happen locally. And in a tight labor market, local businesses must pay more to attract workers, but they can also charge more to customers who have nowhere else to go. Luna: It’s a localized monopoly in effect. Geography becomes the moat. Lucas: Geography and regulation both. Many services are heavily regulated, which limits competition further. That double lock—inelastic demand and restricted supply—is why these prices are so stubborn. We are likely heading into a period where 'disinflation' in goods masks 'reflation' in services. Luna: A refocus on the hidden costs. It changes how we view every paycheck, doesn't it? More goes to fixed obligations, less to savings. Lucas: It does. And that is why financial literacy matters more now. Understanding that your cost of living is driven by labor markets, not just commodity prices, helps you make better career and investment choices. You might choose to invest in sectors that benefit from aging demographics, like healthcare REITs or private equity firms focused on service industries. Luna: Or simply realize that your own skills are your best hedge against this kind of inflation. Becoming indispensable is the ultimate protection. Lucas: Indispensable, or adaptable. The economy is shifting toward valuing human interaction and specialized knowledge over mass production. If you can offer that, you ride the wave instead of drowning in it. Luna: So the final takeaway is that inflation isn't dead; it just moved from the shelf to the service desk. Lucas: That is a sharp way to put it. And unless productivity in services takes a massive leap forward—which history suggests it rarely does—we are stuck with this higher cost baseline. The challenge for policymakers is managing expectations without crushing the labor market that is already under strain. Luna: A delicate balance. Let's see if the December jobs report gives us a clue on whether the Fed will blink first. Lucas: It will. But until then, keep your eyes on the services sector. That is where the real temperature of the economy lies.