Inflation Is Back Up. And That's Not the Worst News.

[00:00:00] Speaker 1: The latest inflation numbers just dropped, which means we now know about the cost of living, the price of energy, what's going to happen to the cost of Thanksgiving, and whether workers' paychecks are keeping up. Spoiler alert, they're not. We've also got a mystery to work through because, well, we're missing some data from last year, so we're going to do some fun estimation to help all of this make sense. I'm Justin Wolfers, and this is Platypus Economics. I'm here to tell you everything you need to know about this latest data drop. Let's get started. The October inflation report is out. Odd thing, it's missing the number we usually lead with, which is how much prices rose over the past year. More on why in a moment. By my estimate, consumer prices rose about 4% over the past year. That's hot. It's up from 3.7% in September, the highest since May, and well above the Fed's 2% target. It came in a lot hotter than Wall Street was expecting. Okay, I'm going to start with the dumbest thing. When we talk about inflation, we normally talk about the rate of change of prices over the past year. So we have the average price level for October of 2026. October of 2025, I don't know if you remember. The government was shut down. Because of that, the Bureau of Labor Statistics couldn't collect prices. Because of that, no one knows what the average price level was a year ago. Because of that, the BLS did not release the year-ended inflation rate, the one you normally used to. So that leaves you and me to fill that gap. And it turns out we know enough math to get that work done. I looked at last year's price level, the missing number, and I just assumed it was the geometric average of what had happened in September and November. What's a geometric average? It's kind of like a normal average, but you have to go to grad school to learn how to do it. Look, it's the obvious fix. It's what everyone's doing. But I just want to tell you up front, that's an estimate. So, you know, if you see me say year-ended inflation was 4.0%, and some other bloke says 3.9%, realize this time they're probably not lying. There are different ways you can think about this. It's all roundabout the same area. Okay, let's really get into the numbers, because that's what we're here for, not the silliness. We already knew before today 11 of the last 12 months in that year-ended number. So the news is what happened in October. Prices rose 0.4% this month. That's the seasonally adjusted rate. And over the year, 4%. If you just took this month's rate, that's an annual rate of more than 4%. So the headline CPI rose 0.4%. It's down from 0.6% in September. But more importantly, Wall Street was expecting a number quite a bit lower. So it came in hotter than expected. Core prices, that's when we exclude energy and food, they rose 0.3%. So that sharper growth in prices this month wasn't really just an energy story. Core prices were only expected by Wall Street to rise by 0.2%. So what you see, I know all of this sounds small, but when it comes to trying to figure out what's going on out there, it is big. Both of these measures came in about 0.1 percentage point hotter than markets had expected. Now, if one month comes in 0.1 hotter, the reason that matters is if that happened every month, all inflation would be more than a percentage point higher. So back to the headlines. Headline inflation, 4%. It's been going up after, due to the Iran war and the resumption of higher energy prices. Strip out those energy prices, strip out food, which also rose sharply this month, and you get annual inflation of 2.8%. Again, very uncomfortable. Well, the most important thing to do here is to compare these numbers to the Fed's inflation target. Now, here's another odd thing. What came out today was the CPI, Consumer Price Index. That's a measure of the cost of living. But it's not the measure the Fed targets for a bunch of mostly complex reasons that are so boring, even I'm not going to repeat them. The Fed targets a different measure of inflation called PCE, Personal Consumption Expenditures Inflation. It's very similar. And most of the time, PCE inflation runs a little bit below CPI inflation. But if you look over the past year or two, the core inflation measure that the Fed looks at is actually running hotter than CPI inflation. And so when I say core inflation is running at 2.8%, the one the Fed cares about is probably running closer to 3. Look, here's a complicated math that I want you to do. Core inflation is running around about 3%. The Fed's looking at 2%. 3% is higher than 2%. That's the problem we face. You could even do subtraction now and say it's a whole percentage point higher. So that's what's going to be very much on people's minds. So again, just cutting through all of this, if it feels like the cost of living keeps rising at an uncomfortably high rate, the data says you're right. If what you were doing was hoping for inflation to start to cool down, calm down a little bit, I'm afraid I don't have good news for you. This report doesn't support that. Okay, so really what's happening to inflation? Again, what I'm going to do is what economists do is focus on core inflation, which is take out food and energy. We sort of know there's an energy story. I'm going to come back. We're going to talk about that energy story in a moment. What I want to do is get a sense of the underlying inflationary momentum in the United States. Well, the past month, as I said, core inflation rose by 0.3%. So if you annualize that, if that continued for the rest of the year, that would give us a rate of 3.6%. Now, these numbers are noisy. You don't want to take one month too seriously. But here's what worries me a whole lot more. If you look at the average inflation rate over the past three months and you reported that again, and I'm looking at core and you reported that in annualized rate, that's running at 3.7%. That is downright uncomfortable. So it just looks like the last three months have had really somewhat higher inflation than we'd had prior to that. In fact, let me just pull up the number. The last three months, we've had inflation at a rate of 3.7%, core inflation. The prior three months, 1.6%. So it doesn't, at a minimum, doesn't look like inflation's heading down and it may well be heating up a bit. And this is core inflation again, so that's not an energy story. That's why folks are worried. There are and remain good reasons to believe that inflation will float down towards where it typically rests, around about 2%. Wages aren't rising that fast. That's one of the most important costs to businesses. But, you know, we just keep hitting this economy with tariffs and then we hit it with an energy shock in Iran. And all of that comes after the supply shocks around COVID. And at this point, we haven't been near 2% inflation for six years. And that might start to develop its own momentum. That is why I think people are staring extra hard at these numbers. There's starting to be a few more reasons to worry about what's going on out there. So let's talk about energy prices. Look, the Iran war caused energy prices to spike. The quickest place you can see that is by looking at the price of oil. The price of oil is up because a lot of it's on the wrong side of the Strait of the Moors. You can't get it over here. It's not just the price of oil that's up, though. The price of diesel is up. That one is a more complicated story because even when the oil gets out, you need refining capacity to turn oil into diesel. And the world's refining capacity, partly because of the bombing of Russia and the Russia-Ukraine war, the world's diesel refinery refining capacity is really not that great. So I worry that the price of diesel might stay higher. Look, here's the thing. Basically, oil rises and other energy prices, gasoline, diesel, heating oil, and so on, they rise with it. If all that happens is they stay high, then that first rise in the price of energy does cause inflation. Inflation is the rate of change of prices, but when it stays there, it doesn't cause ongoing inflation. And that's currently the story right now. And so we're going to see these numbers fall out of the 12-month-ended change. And we're seeing a little bit month-to-month because oil went way up, came down a little bit, went back up a bit. But basically, the story that this creates a temporary surge in energy prices and therefore inflation is right, then the question is whether that starts to flow through or fundamentally change the underlying inflationary psychology of people in the United States. There is some good news beyond this, today's report, which is that we know what's going on with oil prices. And so as the president's pulled back on some of his more aggressive talk towards Iran, he said that fresh attacks are not coming anytime soon, and we've actually seen oil prices come down a bit. So there's some chance of some relief at the pump coming sometime soon. Having said that, for those of us who live in cold climates, I'm coming to you from the Midwest. Much of the rest of my Platypus economics team lives in New York. Heating oil is about to become an important part of our budgets because it gets very cold and the price of oil is high. So this will be the first expensive winter that we've gone through. And for some folks, it's going to end up being a very, very big deal. Okay. Inflation tells us about a key economic indicator. It tells us what's going on with the cost of living. Inflation is also really important because it's a way of figuring out, are workers getting a chance to keep up? Well, over the long, let me talk about what's going on with prices and compare them to wages over a couple of different horizons. We could look at what's happened to wages and prices throughout the entire Trump term, so back since January 2025. And for much of the period early on, wages were rising faster than prices, but particularly since the beginning of the Iran war, prices have made a comeback. And in fact, prices now have risen nearly as much as wages over that period. Basically, the average American worker has got no real wage gains at all over the past almost two years now. So that, I'm sure, is a source of frustration for a lot of people. But if you look more closely, more recently, it's even more painful than that because we all know what's happened is the cost of living has surged again over recent months. Again, that's the direct effect of the Iran war. And so over the past year, prices have risen faster than wages. So over the past year, wages have risen 3.1%, prices have risen 4.0%. That's why it feels like you're sinking underwater a little bit. What that means is that real wages, how much the average American buy with their pay packet, has actually fallen 0.9% over the last year. And I just want to point out that this is not how modern economies are meant to work. We're growing the pie, then everyone's slice should rise with it. And what we see here is for the average American worker, their slice of the real pie that we're baking is getting no bigger. In fact, is shrinking. And, you know, that's particularly true if you happen to be one of those folks. You know, here I'm talking about what's happening to wages on average. Inside an average, there are a bunch of folks who aren't getting that 3.1% wage rise. And if that's you, then, yeah, it's getting harder and harder to pay the bills right now. Okay, I want to bring this back to the other big storyline that we follow when it comes to new inflation data is what it means for the Fed. So if you were, let me give you a bit of the backstory here. Back in September, the Fed raised rates for the first time in months. But then in October was under a lot of pressure to raise rates, but it was the last meeting before the election. So it was under some pressure not to. And they ultimately decided not to raise rates. Okay, well, what's happened today is inflation came in hotter than anyone had expected. And so as of yesterday, folks still thought there was a chance. Here I'm relying on the CME FedWatch data, which is Fed Funds Futures. It's finance blokes betting millions of dollars against each other. As of yesterday, they thought there was still some chance the Fed wouldn't raise rates in December. They now think that's literally no chance at all. And what that means is it's a certainty. Markets rated a certainty. Now, nothing's certain. Death and taxes. But beyond that, nothing's certain. Markets now rated a certainty that the Fed raises rates in December. Here's the interesting part. Markets now think there's a chance that the Fed goes for a double helping. Rather than raising rates by a quarter of a percentage point, the Fed, in fact, could raise rates by half a percentage point. I'm not saying exactly that that's definitely what's going to happen. I'm saying it's now a possibility. Markets say that's about a 15% chance to happen. Really interesting sub-story here. One of the Trump-appointed Fed governors, Chris Waller, who was also one of the runners-up to get the job of Fed chair, he gave a speech in London just a few hours, not that many hours ago, before these data came out. And he said at the time that he was leaning towards voting for an increase of a quarter of a percentage point at the next meeting. But he said if core inflation came in around 0.3% or higher, then, and I quote, a 50 basis point hike in the policy rate should be considered. Well, it just came in exactly 0.3 percentage points higher. In fact, 0.30. So Waller got what he needed to put the double-sized rate hike on the table. He said that if the Fed only raised rate by a quarter of a percentage point, that would quote, put our credibility at risk. And that was a risk that he said he is quote, not eager to take. So at this point, it looks like the real debate at the Fed is whether rates are going to rise by a quarter point or a half point. I think a quarter point is overwhelmingly more likely. The other thing I want you to see, and this is something I think we're going to have to watch very, very closely, is is Kevin Walsh losing control of the Fed? In fact, did he ever have it? Kevin Walsh is over there saying, oh, I don't do forward guidance. And Chris Waller's over in London giving a speech saying, if the number is exactly 0.3, then I'm going to raise rates and think about it being a double helping. It's exactly a cross-purposes. We had two dissents last time and the unique parts of Walsh's Fed, Walshism, not giving forward guidance, everyone else is out there giving it. So I don't have a strong sense that he has control. The formal role of the Fed chair is not that much more powerful than any other Federal Reserve governor. Usually there's a respect that's earned and leadership that's earned. And at this point, it looks like Walsh has not earned that. Okay. Right now, it's November. I can tell because the leaves are looking beautiful and they're falling all around me. Maybe that's why Americans call it fall. Who knows? But what that means is that we're going to get a whole flurry of Thanksgiving talk. Every year, people talk about the cost of Thanksgiving and what's going on. I want to, you know, so you're going to get all those headlines. Look, they're cute. They're somewhat dumb. Who cares about the price of one meal? I care about the prices of all the meals. And, you know, the administration's going to talk about eggs. Egg prices keep falling finally because we're going to have a bird flu. I'm not sure what that tells us about macroeconomic management. Also, I'm not having eggs for Thanksgiving. I'm just not. I mean, I might have a couch for breakfast. But Turkey, Turkey prices are up 10%. You're going to hear that talking point made a whole lot as well. Look, some prices are up a bit more than the overall cost of living. Some are up by a bit less. That's exactly what it normally looks like. I don't think we should be out picking out favourites here. Having said that, I'm going to do one, which is everyone who talks about the price of Thanksgiving is going to miss the most important cost. The most important cost usually is getting to wherever your family is. We actually were hosting this year, but otherwise I'd have to get to Washington or Boston. We'd fly. And airfares are up enormously. They're up about 28% over the past year. If we don't fly, we drive. Well, the price of driving, gasoline, that price is up 38%. Overwhelmingly, that's the most expensive part of Thanksgiving. So, look, I'm here to talk Turkey. The usual gravy train's just not there for us. It is going to be expensive to be on the roads and get to Thanksgiving. Okay, so you can join the Thanksgiving discourse. I figure that, well, talking about Thanksgiving, I want to give thanks. Today's episode is brought to you by Stata, which is the statistical software that I use in my economic research and so do most of my economist friends. One of the things I want to do with Platypus Economics is give you the chance to gain the sort of empirical analysis that will let you do your own analysis without relying on me. So, I've made a fun, okay, wonky, nerdy, nerdy but fun worksheet. So, you can use Stata to figure out the Thanksgiving inflation that will affect your family this holiday season. It puts together all sorts of the different prices of things that you'll need and it allows you to personalise it by talking about which parts of that Thanksgiving basket are more or less important for your family. There's a link at the bottom that you can follow to download the worksheet and use it to develop your statistical skills and start to play along as we do our own analyses. Our goal in this job is to figure out your family's Thanksgiving inflation. Inflation, I can't imagine anything more likely to impress and entertain your family when you arrive for the holiday. Okay, back to the bigger economic questions. Okay, what's happening next? Well, the next report is going to come, next inflation report comes December 10, which is after the next Fed meeting. The BLS will finally be reporting a real year-ended rate. I think we've already seen fairly substantial hints that the inflation rate is not naturally drifting down to where we want it to be. That's going to be the biggest storyline, the most important storyline that we're going to be watching again in a month's time. And I'll be here to talk with you about it. Well, that's all for today. If you enjoy this video, we've got something new for you. A full introductory economics audio course. I want to help you build the skills you need to understand our world and live a better, richer, fuller, more economically informed life. You'll find that along with our weekly newsletter and the podcast at platypuseconomics.com slash subscribe. That's platypuseconomics.com slash subscribe. And remember, stay curious.