Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Wage Price Spiral Trap in Late 2026
Transcript
- Lucas: Look at the latest jobs data coming out this week. Unemployment claims are sitting near their lowest levels since the nineteen sixties, which sounds great if you’re looking for work, but it creates a massive headache for anyone trying to understand why prices won’t stop rising. Luna: Right, because when nobody wants to quit or get fired, wages stay high, and businesses pass those costs right along to us. Lucas: Exactly. We talk a lot about goods inflation cooling off, and that’s true. But look at the core CPI reading from early September, which came in at three hundred thirty-six point three. That number isn’t moving down fast enough, and the primary driver is no longer shipping containers or used cars. It is the cost of labor in the services sector. Luna: So we are stuck in what economists call a wage-price spiral, where higher paychecks force companies to raise prices, which then demands even higher paychecks. Lucas: That is the textbook definition, but let’s get specific about how it works in late twenty twenty-six. The Fed Funds rate is currently sitting around three point eight eight percent, yet the ten-year breakeven inflation rate has ticked up to two point three four percent. Investors are nervous that the labor market is so tight that wage growth will remain stubbornly above what the Federal Reserve considers healthy. Luna: And that means the central bank might have to keep rates higher for longer, even if the broader economy looks okay on paper. Lucas: Precisely. Think about a local restaurant or a healthcare provider. Their biggest expense is not ingredients or medical supplies; it is staff. When the labor market is this scarce, they cannot easily replace workers, so they grant raises to retain talent. Those raises become permanent fixed costs. Once a business accepts a higher payroll bill, they rarely lower prices again. They just keep them there. Luna: It’s like a ratchet mechanism. Prices go up with wages, but they never really come back down when wages stabilize. Lucas: A perfect analogy. And this is why the PCE price index, which the Fed prefers, is still creeping up. In August, the core PCE hit one hundred thirty point five. It’s a slow burn, but it is persistent. For everyday people, this explains why your cost of living gap feels so wide compared to the official inflation reports. Luna: Because you are paying for the service part of your life, which is dominated by labor, while goods prices have actually softened. Lucas: Spot on. Let’s look at the housing market for a second. Housing is flashing warning signs right now as the Fed weighs more rate hikes. Rent and shelter costs make up a huge chunk of the CPI basket, and those costs are directly tied to construction labor and property management wages. If those sectors can’t find workers without paying a premium, your rent check stays elevated. Luna: It’s frustrating because it feels like the problem is moving. First it was supply chains, then it was energy, and now it’s just people getting paid too much. Lucas: Well, being paid fairly isn’t inherently bad news, Luna. The issue is that the economy overheated on the demand side during the pandemic recovery, and now we are dealing with the aftermath. Employers are locked into contracts and commitments that require them to pay these higher wages regardless of whether consumer demand is strong enough to support them. Luna: So businesses are essentially subsidizing their own operational costs through customer prices, hoping volume will save them. Lucas: Sometimes. But often they just accept thinner margins because they know competitors are doing the same thing. It’s a collective action problem. No single company wants to be the first to cut prices and lose market share, especially when their input costs are rising. This dynamic keeps the whole system inflated. Luna: Does this mean the Fed has to break something to fix it? Like they did in the nineteen eighties? Lucas: Paul Volcker had to push unemployment very high to crush inflation expectations back then. Today, the political pressure is immense. We saw recent surveys showing approval ratings dropping on economic issues, and politicians are wary of causing a spike in joblessness. So the Fed is walking a tightrope, trying to cool the labor market without triggering a recession. Luna: Which makes every single jobs report feel like a bomb going off in the markets. Lucas: Absolutely. And this brings us to a crucial point for listeners navigating their careers and finances right now. If you are an employee, you have leverage. You can negotiate harder because your employer is desperate for stability. But if you are a business owner, you have to watch your operating expenses closely. Luna: I would bet that small businesses are struggling with this more than large corporations who can absorb the hit for a quarter or two. Lucas: You are likely correct. Large tech giants and retail chains have scale and pricing power. A small diner or a local logistics firm does not. They face the same wage pressures but lack the brand strength to simply raise menu prices without losing customers. This is where we might see some consolidation in the market as weaker players get squeezed out. Luna: That sounds painful for the average entrepreneur. Is there any relief in sight for this wage-price dynamic? Lucas: There are a few levers. One is automation. We are seeing car buyers demanding better tech and lower prices, forcing automakers to innovate. That same pressure is spreading to other service industries. Companies are investing in software and AI to reduce their reliance on human headcount for routine tasks. Luna: So technology becomes the antidote to labor inflation? That seems like a double-edged sword for workers. Lucas: It definitely is. If you are in a role that can be automated, your bargaining power might decrease over time. But if you are in a role that requires complex human interaction, your value goes up. The divergence here will be stark over the next twelve months. Luna: So the advice is basically: specialize in things machines can’t do, and don’t expect your rent to drop anytime soon. Lucas: Something like that. And speaking of helping listeners navigate these tricky financial waters, I want to take a quick moment to acknowledge why we do this show. If walking through the economy with us has made something click, like understanding why your paycheck doesn’t stretch as far, the way these stay ad-free is listener support. Luna: Yeah, buying me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. helps keep the research deep and the ads away. Lucas: We appreciate every bit of it. It allows us to dig into these structural shifts instead of just chasing daily headlines. Now, back to the numbers. Luna: Thanks for the support. Where were we with the automation angle? Lucas: We were talking about how automation acts as a deflationary force against wages. But it takes time. In the short term, you are still stuck with the legacy costs of the last few years of hiring. That is why the lag effect is so pronounced right now. Luna: It feels like we are driving a car that is still rolling forward even after we took our foot off the gas. Lucas: That is exactly it. Momentum. The inertia of past decisions. The contracts signed eighteen months ago are dictating your budget today. Until those contracts expire and are renegotiated in a softer labor market, prices will remain sticky. Luna: So patience is the only strategy for consumers right now? Wait for the cycle to turn? Lucas: Patience, yes, but also adaptation. Locking in fixed-rate mortgages before rates climb further, or negotiating long-term contracts with suppliers who are feeling the same squeeze. Understanding the macro environment helps you make micro decisions that protect your wealth. Luna: It’s hard to plan when everything feels temporary, but I guess that’s the reality of late twenty twenty-six. Lucas: It is. And as we move toward the end of the year, watch the quarterly earnings reports. Look for companies mentioning labor costs in their guidance. That will tell you if the spiral is accelerating or finally beginning to unwind. Luna: Good advice. Keep an eye on the payroll line item, not just the revenue. Lucas: Exactly. Because that is where the truth about inflation lives. It’s not in the stock price; it’s in the cost of doing business. And until that changes, the cost of living will keep reflecting the tension between what workers deserve and what businesses can afford. Luna: A difficult balance, but one we need to understand to make sense of our wallets. Lucas: Right. So the question for next week is whether the Fed can engineer a soft landing without breaking the labor market entirely, or if we are heading for a harder correction. Luna: I suspect the latter is becoming more likely given those jobless claim lows. Lucas: Let’s see what the data says. Stay tuned.