Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Grocery Receipt Feels Heavier Than Your Paycheck
Transcript
- Lucas: Look at the headline inflation numbers for July. Core CPI is sitting at three hundred thirty-six point eight, which is up just a fraction from June, and the broader CPI is at three hundred thirty-two point eight. On paper, things are stabilizing. The Fed should be breathing easier, and the ten-year breakeven rate has held flat at two point three one percent all week. Luna: Right, and yet I went to the supermarket this morning and my basket cost me fifteen percent more than it did last year. The macro data says one thing, but my receipt screams another. Lucas: That disconnect is exactly what we need to talk about today. It’s not that inflation is back in the wild; it’s that the of inflation has shifted toward items that are incredibly sticky. Food, in particular, doesn’t behave like energy or housing. Once those prices move up, they rarely come back down, even if the underlying costs to producers stabilize. Luna: So you’re saying the average consumer isn’t seeing relief because the stuff they buy every week—milk, eggs, meat—is locked in at higher margins? Lucas: Exactly. And here is the concrete detail most people miss: while headline inflation is cooling, the Employment Cost Index for wages rose to one hundred seventy-nine point zero in the second quarter. That’s solid growth, but let’s look at the median usual weekly earnings for private industry workers, which hit one thousand two hundred four dollars. When you divide that by the price level of the goods you actually consume daily, you see real purchasing power isn’t growing as fast as the nominal paycheck suggests. Luna: Wait, hold on. If wages are rising, why does it feel like we’re falling behind? Is it just math, or is there a behavioral piece here? Lucas: It’s both. Let’s talk about the donation link for a second, though. Honestly, if walking through the economy with us has made something click, that’s the link — buy me a coffee dot com slash fexingo. It keeps the research ad-free so we can keep digging into these nuances rather than chasing clicks. Luna: Appreciate it. Anyway, back to the behavior piece. You think people are just hyper-aware of small price hikes now? Lucas: Absolutely. There is a psychological anchoring effect. When bread goes from four dollars to five dollars, you notice. When it stays at five dollars for six months, you stop noticing, even though you are paying significantly more than you were a year ago. This is what economists call 'price stickiness.' Retailers have absorbed some supply chain improvements, but they aren’t rolling back prices to previous levels because their operating costs—labor, logistics—have permanently reset higher. Luna: So the baseline has moved up, but our expectations haven’t adjusted until we compare it to the past. That creates this illusion of 'still high' inflation even when the monthly change is tiny. Lucas: Spot on. And let’s bring in the data point that really hurts. Average hourly earnings for private sector workers are at thirty-seven dollars and sixty cents. But remember, the PCE price index—the Federal Reserve’s preferred gauge—is at one hundred thirty-one point seven. If we look at the real wage growth, adjusting for that PCE number, we see that while nominal wages are up, real wages are barely keeping pace with the specific bundle of goods that makes up a modern household budget. Luna: But isn’t thirty-seven dollars an hour pretty strong compared to pre-pandemic levels? How much of this is just comparison shopping with 2019? Lucas: It is stronger, yes. But let’s look at the distribution. The median usual weekly earnings are twelve hundred and four dollars. For lower-income households, who spend a larger percentage of their income on food and essentials, that median number doesn’t help them nearly as much. They don’t have the buffer to absorb the sticker shock. Their inflation rate, effectively, is much higher than the headline three percent because their basket is weighted heavily toward sticky categories. Luna: So the aggregate number hides the stratification. A tech worker and a service worker might see the same CPI print, but their lived reality is totally different. Lucas: Precisely. And this ties into the broader market environment we’re seeing right now. The S&P 500 is at seven thousand six hundred thirty-one, and the Dow is at fifty-two thousand seven hundred sixty-seven. Those indices are driven by large-cap tech and financials, which benefit from efficiency gains and AI integration. But those companies aren’t directly lowering the price of milk for your neighbor in Ohio. Luna: Which brings us back to the disconnect between Wall Street performance and Main Street grocery bills. Why do you think food retailers are so reluctant to cut prices even when input costs drop? Lucas: It’s margin protection. After years of thin margins during the pandemic, retailers rebuilt their balance sheets. Now, when commodity prices for soybeans or wheat stabilize, they don’t pass the savings to consumers. Instead, they use the stability to improve their own bottom line. It’s rational corporate behavior, but it means the consumer never sees the 'reflation' in their wallet. Luna: That sounds frustratingly efficient. So how does a regular person navigate this? Do we just accept that the floor for our cost of living has permanently risen? Lucas: I think we have to adjust our mental models. You can’t expect the CPI to go negative again. The goal now is to get your personal inflation rate below your wage growth rate. And that requires looking at your specific basket. If you’re spending twenty percent of your income on dining out, that’s a volatile category. If you’re spending it on dry goods, that’s sticky. Awareness is the first step to optimization. Luna: So instead of waiting for the government to fix inflation, we optimize our own consumption bundles to avoid the stickiest parts? Lucas: Yes. And consider the employment data. The JOLTS report and NFP numbers show labor is still tight. Wages will likely continue to rise modestly, maybe around four percent year-over-year. If you can leverage that wage growth to pay down variable-rate debt, you insulate yourself from future price shocks. Debt service is a fixed cost, but groceries are variable. Managing the fixed side gives you breathing room on the variable side. Luna: I like that framing. It shifts the focus from complaining about prices to managing cash flow dynamics. What about the global context? We saw Eurozone inflation creep back above three percent recently. Lucas: That’s relevant because global supply chains are interconnected. If Europe is facing higher energy and food costs due to geopolitical tensions, those pressures trickle into US import prices. Even if domestic production is stable, we import a lot of agricultural products. So the local grocery store price is partly a function of decisions made in Brussels and Beijing. Luna: China’s factory activity shrinking for the second month must add some noise to that mix too, right? Lucas: It adds complexity, but less direct pressure on food prices than it does on durable goods. However, it signals slower global demand, which could eventually put downward pressure on industrial commodities. But again, that doesn’t translate to faster grocery price cuts. It might slow down the price increases on electronics or furniture, which is good, but it won’t lower the cost of beef or produce. Luna: So we’re looking at a bifurcated inflation landscape. Sticky services and food, softer durables. Does that mean the Fed will keep rates higher for longer? Lucas: Likely. The FOMC knows that food and energy volatility is hard to control with interest rates. They focus on core measures, but they also watch wage growth closely. With the Employment Cost Index rising, they need to ensure that wage growth doesn’t fuel a secondary inflationary spiral in services. So rates probably stay restrictive until we see clear evidence that core services inflation is decelerating sustainably. Luna: It feels like we’re in a long tail of adjustment. No dramatic crash, no sudden boom. Just a slow grind toward a new normal. Lucas: That’s the best-case scenario, honestly. A soft landing where prices stabilize but don’t collapse. The risk is always that the stickiness becomes entrenched. If workers demand higher wages to match the permanent increase in food costs, and businesses raise prices to cover those wages, you get a wage-price spiral. We aren’t there yet, but it’s the shadow hanging over the entire economic discussion. Luna: Given that shadow, what’s one actionable takeaway for someone listening who feels like their paycheck is losing value every time they shop? Lucas: Track your personal inflation rate. Look at your bank statements from last September and compare them to this September, excluding mortgage or rent if possible. Focus on the categories where you spend the most. Then, negotiate or switch providers in the flexible areas—internet, insurance, subscriptions—to free up cash for the sticky essentials. You can’t control the price of milk, but you can control the rest of the bill. Luna: Practical and empowering. It turns a macro problem into a micro management task. Lucas: Exactly. And remember, the median weekly earning of twelve hundred and four dollars is a historical high in nominal terms. The challenge isn’t that you’re earning less; it’s that the purchasing power of that dollar has been eroded incrementally, almost invisibly, until now. Luna: So the next time you see the news say inflation is under control, ask yourself: whose inflation? And what’s in their basket? Lucas: That’s the question. Because for millions of Americans, the answer to 'under control' is a resounding 'no,' even if the ten-year breakeven rate says otherwise. Luna: We’ll leave you with that thought as you head to the checkout line this week.