Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Grocery Bill Won't Come Down
Transcript
- Lucas: If you’ve walked through a supermarket aisle in the last two weeks, you know that the macroeconomic narrative and your actual wallet are telling two very different stories. The headlines this week were full of relief, with the ten-year breakeven inflation rate ticking down to two point three three percent on Friday, suggesting the worst of the inflationary spike is finally over. Luna: But my credit card statement for organic eggs and olive oil suggests otherwise. It feels like the floor has been pulled out from under those comfort metrics. Lucas: Exactly. And here is the thing: we need to stop treating all inflation as if it’s one big, monolithic blob. When we look at the core PCE price index for August, which came in at one hundred thirty point five, we see broad stability. But that average hides the structural rigidity in specific sectors, particularly food and shelter, where prices have proven remarkably sticky. Luna: So you’re saying the average is lying to us? Or just masking the parts that hurt most? Lucas: Masking, mostly. Let’s look at the Employment Cost Index for wages, which sat at one hundred seventy-nine as of April. That tells us labor costs are rising, but slowly. However, in the grocery sector, that slow rise isn’t being absorbed by efficiency gains. It’s being passed directly to the consumer because there are fewer players left who can absorb the hit. Luna: Right, and when I buy coffee or bread, I’m not dealing with a competitive market anymore. I’m dealing with three companies that have already raised their margins. Lucas: That is the crux of it. We saw a similar pattern in India’s retail inflation recently, which jumped to five point five four percent in September despite global easing. It shows that once price expectations become embedded in local supply chains, they don’t vanish just because energy prices dip. The grocery cart is insulated from the broader cooling trend. Luna: It’s almost like a tariff shock, but internal. The pressure comes from inside the distribution network rather than across borders. Lucas: I think that’s a fair comparison. The infrastructure of how food moves—from farm to warehouse to shelf—has become more expensive due to labor and compliance costs. And unlike gasoline, which is globally traded and highly volatile, food prices are locally sticky. You can’t arbitrage away a higher wholesale cost for milk in Ohio just because prices are lower in Kansas. Luna: So the solution isn’t waiting for interest rates to drop. It’s about market structure. Lucas: Precisely. And that brings us to the wage side of the equation. Average hourly earnings for private workers are now at thirty-seven dollars and eighty cents. That sounds like growth, right? But when you compare that to the median usual weekly earnings of twelve hundred and four dollars, you see the squeeze. Wages are up, but not enough to offset the compounded annual increase in staple goods. Luna: It’s the classic purchasing power trap. You earn more, but the baseline cost of survival rises faster. Lucas: Yes. And notice how the CPI for all urban consumers hit three hundred thirty-four point one in August. That number is an aggregate. If you strip out food and energy, the Core CPI is at three hundred thirty-seven point eight. The fact that the Core number is HIGHER than the headline number is unusual. It means non-food items are driving the inflation narrative, while food remains stubbornly elevated. Luna: Wait, so services are still inflating faster than goods? That changes the conversation entirely. Lucas: It does. For years, we assumed goods would be the problem because of pandemic supply chains. Now, goods are normalizing, but services—which include healthcare, housing, and yes, the labor-intensive parts of food service—are where the heat is. The grocery store is a service industry disguised as a product retailer. Luna: Because you pay for the clerk, the manager, the delivery driver, not just the apple. Lucas: Exactly. And since the World Bank recently urged crisis-era employment support measures, we are seeing a policy environment that prioritizes job retention over aggressive deflation. This keeps wages stable, which is good for employment, but it keeps the cost base high for retailers. They aren’t going to lower prices until they have to fire people. Luna: That’s a brutal trade-off. Stability for the worker means stagnation for the consumer’s buying power. Lucas: It is. And look at the S&P 500, which is hovering around seven thousand eight hundred. Investors are pricing in a soft landing. But the soft landing is for corporate profits, not necessarily for household budgets. Companies are maintaining margins by keeping prices high, supported by steady consumer demand despite the sticker shock. Luna: So the market is happy, but the shopper is stressed. How long does this divergence last? Lucas: Until the labor market tightens further or consumer debt becomes untenable. And speaking of debt, recent reports indicate American debt problems are flashing warnings not seen since the Great Recession. When households start defaulting on credit cards, retailers will eventually be forced to slash prices to clear inventory. Until then, we are in the holding pattern. Luna: So the trigger for falling grocery prices isn’t inflation data. It’s financial distress. Lucas: Historically, yes. Prices fall when volume collapses. But we haven’t seen volume collapse yet. People are still buying, just buying less premium brands. That shift in behavior is invisible in the aggregate CPI but very real in the store aisle. Luna: It’s a silent recession in quality, even if the headline numbers look fine. Lucas: That’s a sharp way to put it. We are seeing a bifurcation of the American economy. One part is enjoying the benefits of productivity gains and stock growth. The other part is navigating a persistent cost of living hike that wages haven’t fully caught up to yet. Luna: And given that the Nobel prize in economics just went to researchers focused on these exact dynamics, maybe we should pay more attention to the micro-level mechanics. Lucas: Hall and Woodford’s work emphasizes the role of expectations. If consumers expect prices to stay high, they act differently. They trade down. That behavioral shift reinforces the retailer’s pricing power. It’s a self-fulfilling prophecy until something breaks the cycle. Luna: What breaks it? A major supply shock? Or just exhaustion? Lucas: Probably exhaustion. But until then, the advice for listeners is simple: do not wait for the macro indicators to signal that your grocery bill is safe. Use the data to plan. Lock in prices where you can, diversify suppliers, and understand that your personal inflation rate is likely higher than the official CPI. Luna: Practical advice for a theoretical problem. I appreciate that. Lucas: We try. And before we go deeper into the housing market’s impact on this, I want to take a quick moment to acknowledge the people who make this show possible. Luna: Yeah, the research behind these economic deep dives takes time and resources to pull together accurately. Lucas: 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 lights on and the ads off. Luna: Thanks for supporting independent journalism. Now, let’s get back to why rent is still climbing. Lucas: Right. So if wages are up and food is sticky, where is the next pressure point? It’s housing. The Employment Cost Index didn’t just track wages; it tracked benefits. And benefits are heavily tied to healthcare and insurance premiums, which are rising faster than general inflation. Luna: So you’re earning more, but your insurance deduction is eating the raise before it hits your bank account. Lucas: Exactly. And since housing is the largest component of the CPI basket, any uptick in insurance costs feeds directly into shelter inflation. Landlords pass these costs on. Tenants pay them. It’s a closed loop that doesn’t care about the ten-year Treasury yield. Luna: Which means the 'cost of living' isn’t just about what you buy today. It’s about what you’re insured against tomorrow. Lucas: Precisely. And that is why the disconnect between your paycheck and your purchasing power will persist until either wages surge dramatically or insurance costs deflate. Given current trends, neither seems imminent in the short term. Luna: So we adjust our expectations. We accept that 'normal' looks different now. Lucas: We do. And the question for the rest of 2026 isn’t whether inflation will return to two percent. It’s whether your income can structurally adapt to this new baseline. Because the baseline isn’t moving back down anytime soon.