Groceries & Gouging

Episode Summary

Executive Summary: The episode centered on a strong July CPI report showing continued disinflation, with headline and core inflation both cooling and shelter/used cars providing mixed but generally favorable signals. The hosts argued inflation is no longer broadly acute, debated whether price gouging or fiscal stimulus meaningfully drove inflation, and concluded supply shocks from the pandemic and Russia’s war were the main causes. They also highlighted that many everyday prices remain far above pre-pandemic levels, which sustains public frustration.

Main Topics: July CPI and disinflation trend (Priority: 5/5): The group agreed July inflation data were reassuring: headline CPI rose modestly, core inflation cooled, and the broader trend remains downward toward the Fed’s target. Shelter, rent, and housing-related inflation (Priority: 4/5): Shelter was still a major contributor to monthly inflation, but the panel stressed market-rent data suggest CPI shelter measures should keep easing over time. Vehicle price deflation and consumer behavior (Priority: 4/5): New and used vehicle prices continued to fall, reflecting weak demand, expectations of lower rates, and a wait-and-see consumer psychology. Price gouging debate and market competition (Priority: 5/5): The hosts discussed political claims that corporations are gouging consumers, but largely rejected gouging as a broad explanation and emphasized competition and market structure instead. Fiscal stimulus and inflation (Priority: 4/5): They debated whether pandemic-era fiscal support, especially the American Rescue Plan, contributed to inflation, concluding it mattered early on but was not the dominant driver over time. What the CPI means for the Fed and PCE (Priority: 5/5): The panel translated CPI/PPI results into expected PCE inflation, suggesting the Fed’s preferred measure remains above target but is trending down and may not justify continued tight policy for long. Everyday affordability and political implications (Priority: 5/5): They noted that even with inflation cooling, groceries, rent, and gas remain much higher than pre-pandemic levels, sustaining voter anger and making affordability a major election issue.

Key Arguments: Inflation is steadily cooling and July’s CPI was another strong disinflation report, with little in the data to alarm policymakers. Headline CPI and core CPI are now moving at rates consistent with an annual pace near the Fed’s target, though PCE remains somewhat above 2%. Shelter inflation is still the biggest near-term driver, but market rent data imply more deceleration ahead. Used and new vehicle prices are falling because demand is soft and buyers expect better financing or lower prices later. Price gouging is not a convincing broad explanation for inflation; isolated examples may exist, but most price increases reflect supply shocks, market power in a few industries, and normal supply-demand dynamics. Fiscal stimulus, especially the American Rescue Plan, likely added demand early in the inflation episode, but its effect has largely faded and it was not the primary long-run driver. The dominant causes of the inflation surge were pandemic supply shocks and the Russia-Ukraine war, which temporarily pushed prices up and then faded as conditions normalized. Public anger remains rational because many categories are still 20% to 25% above pre-pandemic levels even though inflation rates have slowed. Wage growth has outpaced food-at-home inflation for an extended period, easing some pressure on consumers even if costs still feel high.

Data Points: Headline CPI month-over-month: 0.2% - July CPI increase from June, described as a reassuring reading Headline CPI year-over-year: 2.9% - July year-over-year rate, down from 3.0% and above the Fed’s 2% target Core CPI month-over-month: 0.17% - July core CPI increase, rounded to 0.2% Core CPI year-over-year: 3.2% - July core CPI annual rate, down from 3.3% in June Supercore services inflation year-over-year: 4.7% - Services inflation excluding shelter/housing was discussed as still elevated but trending down CPI excluding shelter year-over-year: 1.7% - Inflation excluding shelter was described as flat on the month and below 2% annually CPI excluding shelter monthly change: 0.0% - Shelter-excluded CPI was flat in the month Six-month annualized CPI: 2.8% - Used as a short-term gauge of underlying inflation pressure Shelter CPI monthly increase: about 0.4% - Largest contributor to headline and core CPI in July Food at home month-over-month: 0.1% - Grocery prices rose only slightly in July Food at home year-over-year: 1.1% - Grocery inflation remained very mild on an annual basis New vehicle prices year-over-year: down about 1% - New car prices have fallen for nine of the last 10 months Used vehicle prices month-over-month: -2.3% - Used car prices fell sharply in July Used vehicle prices year-over-year: about -11% - Used car prices were far below a year earlier Motor vehicle insurance month-over-month: 1.2% - A notable July increase highlighted as a consumer pain point Motor vehicle insurance year-over-year: 18-19% - Insurance inflation remained very high Headline PCE deflator forecast month-over-month: 0.18% - Projected based on CPI/PPI for the upcoming release Headline PCE deflator forecast year-over-year: 2.6% - Expected to rise from 2.5% to 2.6% on base effects Core PCE deflator forecast month-over-month: 0.16% - Projected monthly increase for the Fed’s preferred measure Core PCE deflator forecast year-over-year: 2.7% - Expected to rise from 2.6% to 2.7% due to base effects Food at home since Feb. 2020: 25.2% - Marissa used this as a key example of persistent post-pandemic price increases CPI excluding food since Feb. 2020: 20.2% - Compared with food-at-home to show groceries rose faster than the broader basket Food inflation over a pre-pandemic four-year period: 1.0% - From Feb. 2016 to Feb. 2020, grocery prices were nearly flat before the inflation shock Average hourly earnings vs. food at home: 18 months in a row - Wages have grown faster than grocery prices for 18 consecutive months Average hourly earnings vs. food at home since late 2019: higher than food-at-home inflation - Used to argue wage growth has partly offset necessities inflation

Pivotal Quotes: "I think it's extremely difficult at this point to argue that there's any kind of worrying underlying inflation." — Matt Collier: Summing up the July CPI as evidence that inflation is no longer broadly problematic "I find it difficult to accept that at least on a broad basis." — Chris Dorides: Responding to the idea that price gouging is a general explanation for inflation "I think it's the supply shocks, the pandemic, Russian war, tippity top, tippity top." — Mark Zandi: Ranking the main causes of the inflation surge

Implications: Inflation appears to be easing enough to support eventual Fed rate cuts, but politics will stay focused on still-high prices rather than inflation rates. Consumers may feel little relief until shelter, insurance, and other sticky categories cool further.