Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Tariff Price Shock in Your Grocery Cart
Transcript
- Lucas: If walking through the economy with us has made something click, or even just helped you make sense of the noise this week, I want to ask for your help keeping this independent. A couple of dollars a month is genuinely what keeps these going, so if you've gotten something out of the conversation, check out buy me a coffee dot com slash fexingo. It really does add up to keep the lights on. Luna: Yeah, and it lets us dig into the stuff that usually gets buried in the headlines without worrying about advertiser pressure. Thanks for listening. Lucas: Let's get straight into it. There is a very specific distortion happening in the consumer price index right now that most people are missing because they are looking at the wrong number. The New York Fed just released a report stating that inflation on many everyday items was entirely due to tariffs. That is a structural shift, not just a cyclical bump. Luna: So when I go to the grocery store and see eggs or canned goods jump five percent overnight, that isn't supply chain friction anymore? That is policy? Lucas: Exactly. And this changes the entire dynamic for workers trying to hold onto their purchasing power. Look at the latest CPI data for August. The headline CPI is at three hundred thirty-four point one, up from three hundred thirty-two point eight one the prior month. But the core CPI, which excludes food and energy, is sitting at three hundred thirty-seven point eight. The fact that core is higher than headline tells us something interesting about where the pressure is actually coming from. Luna: Usually core is sticky because services are expensive. If headline is lower, does that mean food and energy are actually falling? Lucas: Not necessarily falling, but the volatility is being driven by imported goods hitting the tariff wall. When you tax an import, the retailer doesn't eat that cost. They pass it directly to you. So while the Federal Reserve and other institutions watch the core PCE price index closely—which is currently at one hundred thirty point five—they are watching a metric that might be lagging behind the immediate sticker shock you feel at checkout. Luna: That feels like a huge disconnect for someone living paycheck to paycheck. You can't wait six months for the PCE data to tell you your rent or your groceries went up. Lucas: Right. And here is the cruel part. Average hourly earnings for private sector workers are at thirty-seven dollars and eighty cents, up slightly from thirty-seven dollars and seventy-six cents. That is a gain, technically. But if the price of the basket of goods you buy is rising faster because of a tax on imports, that real wage growth evaporates instantly. Luna: It feels like we are paying for two things: our labor and the trade policy. Is there any buffer left for savings? Lucas: That is the question everyone is asking. We saw headlines earlier this week about Americans' debt problems flashing a warning not seen since the Great Recession. That is not happening because people are suddenly buying luxury cars. It is happening because the baseline cost of existence has shifted upward due to these tariff-induced price hikes. Luna: So the debt isn't a choice, it is a consequence of the new normal pricing structure? Lucas: Precisely. Let's look at the Employment Cost Index for wages. It was at one hundred seventy-nine point zero as of April, up from one hundred seventy-seven point five. Wages are creeping up. But the breakeven inflation rate on the ten-year Treasury dropped slightly to two point thirty-three percent. Investors are saying, 'Okay, long term inflation expectations are stable.' But you are in the short term, dealing with immediate price shocks. Luna: Investors have a ten-year horizon. I have a twenty-eight-day pay cycle. Those are completely different worlds. Lucas: They are. And the market is reflecting that. The S&P five hundred is up half a percent over the last five days to seven thousand eight hundred twelve. The Dow is up to fifty-one thousand six hundred fifty-five. The stock market is doing fine, largely ignoring the pain at the register. But the Nasdaq is down point four percent, and the Russell two thousand, which holds a lot of smaller domestic companies, is down one point four percent. Luna: Why would small caps drop if the big tech stocks are holding up? Isn't the domestic focus supposed to help them? Lucas: Because small caps often rely on global supply chains for components. If those components get taxed, their margins get squeezed before they can even raise prices. Meanwhile, the big conglomerates have the scale to absorb some of that hit or move production overseas more easily. So the tariff shock hits the little guy twice: once as a consumer raising his costs, and once as a small business owner raising his inputs. Luna: It sounds like a wealth transfer from the bottom up, disguised as economic policy. Lucas: That is a fair way to put it. And it explains why the median usual weekly earnings, which were at one thousand two hundred four dollars back in January, don't feel like they are moving enough. You need a bigger jump in nominal wages to offset a structural increase in the price level caused by tariffs. Luna: So what should someone do? Ignore the news and hope wages catch up? Lucas: No. You have to adjust your expectations for discretionary spending. If you know that imported goods are now subject to a premium, you prioritize domestic alternatives or durable goods that won't face repeated tariff rounds. It is about defensive financial planning in an aggressive trade environment. Luna: Defensive means cutting back on imports? Or just being smarter about what you buy? Lucas: Both. But mostly it means recognizing that the 'bargain' you used to find on certain imported goods is gone. The math has changed. The price tag includes the tax now. If you are budgeting based on last year's prices, you are already behind. Luna: That is a hard pill to swallow. You work harder, earn more, but buy less because the government took a cut of every transaction. Lucas: Effectively, yes. And the irony is that the FOMC is watching all of this. They are trying to steer the ship using interest rates, but tariffs are a fiscal tool, not a monetary one. The central bank can't fix a tariff-induced price spike by raising rates. In fact, raising rates might just hurt employment further while doing nothing to lower the price of imported steel or electronics. Luna: So we are stuck between a rock and a hard place? High prices and stagnant real wages? Lucas: For now, yes. But the data shows that inflation fears are rising. The one-year outlook in the Fed survey hit its highest level since May twenty twenty three. People are feeling it. The VIX is calm, but the underlying anxiety in the consumer sentiment numbers is ticking up. Luna: Do you think this will force a policy reversal, or will they just let the pain play out? Lucas: History suggests they try to manage the symptoms rather than change the cause. They will likely keep rates where they are and hope the labor market cools enough to stop wage demands, thereby cooling inflation from the demand side. But if the supply side is being taxed, cooling demand just hurts workers. Luna: It feels like the worker is getting squeezed from both ends. Higher costs, lower bargaining power. Lucas: That is the reality of October twenty twenty six. The productivity payoff we talked about in previous episodes is being eaten away by these external shocks. The efficiency gains in manufacturing aren't making it to your wallet because the margin is being captured by the tariff revenue. Luna: So the take home message is: don't trust the headline inflation number. Look at what is actually on your shelf. Lucas: Exactly. The headline number might look tame, but the core reality of your monthly expenses is telling a much steeper story. Keep an eye on those imported goods categories. That is where the truth is hiding. Luna: Thanks for breaking that down, Lucas. It is unsettling, but at least it makes sense now. Lucas: It does. And knowing the source of the problem is the first step to protecting your budget against it. What do you think? Are you seeing this tariff effect in your own cart yet?