Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Productivity Gap Eating Your Paycheck
Transcript
- Lucas: Here’s the thing about October twenty twenty six that keeps me up at night. It’s not that wages have stopped growing. The Bureau of Labor Statistics just reported average hourly earnings hit thirty seven dollars and eighty cents in September. That’s a gain. On paper. Luna: But on my kitchen table, it feels like I’m spending more to buy less. What’s missing from that headline? Lucas: The denominator. Specifically, the sticky nature of service-sector pricing. While goods inflation has cooled, services remain stubborn. Core CPI, which strips out food and energy, sits at three hundred thirty eight point nine. That number is moving slower than it was two years ago, yes, but it’s still above the Federal Reserve’s two percent target. Luna: So we’re in this weird limbo where prices aren’t spiking, they’re just refusing to come down, right? Lucas: Exactly. And here is the concrete detail that matters: corporate margins in the service sector have been expanding. Companies like major hotel chains and insurance providers are using their pricing power to maintain profit levels even as labor costs rise. They aren’t passing the cost of higher wages onto consumers; they are absorbing them by raising prices elsewhere. Luna: That sounds like a classic wage-price spiral, but with the wage part lagging behind the price part. Lucas: It’s a stalled spiral. Look at the Employment Cost Index. Wages went up, but productivity hasn’t kept pace. When companies pay more per hour but don’t get more output per hour, they raise prices to protect their bottom line. That erodes the very purchasing power that wage increase was supposed to boost. Luna: So my raise gets eaten by the price of staying connected, staying insured, and staying housed. Lucas: Precisely. Let’s look at the housing component. Rents are still adjusting to previous shocks. Even if your nominal rent stays flat, the effective cost relative to your income might be shifting because other essentials, like healthcare and auto insurance, are climbing. Auto insurance premiums alone have surged due to repair costs and fraud. Luna: I’ve seen posts from drivers paying double what they did five years ago for basic liability. That’s not an abstract economic concept; that’s a budget killer. Lucas: Right. And these costs are non-discretionary. You can stop buying new clothes or eating out. You cannot stop driving to work or losing your health coverage. So when the basket of goods you must consume gets heavier, wage growth feels illusory. Luna: Does the Fed see this? Are they watching the service sector margins specifically? Lucas: They are watching the broader inflation metrics, but they are increasingly focused on unit labor costs. If unit labor costs rise faster than productivity, inflation tends to stick. The recent FOMC meeting hints that rate cuts are off the table for now. The market had priced in a cut this week, but those expectations shifted after officials signaled caution. Luna: So no relief from interest rates either. Borrowing costs stay high while prices stay high. Lucas: Correct. And this creates a squeeze on the middle class. High-income earners can absorb the price hikes because their assets appreciate. Low-income earners live paycheck to paycheck. But the middle, who rely on steady wage growth to save, find themselves stagnant. Their nominal income goes up one percent, but their essential costs go up two percent. Luna: It’s a silent tax on stability. Lucas: Let’s talk about the ten-year Treasury breakeven inflation rate. It’s sitting at two point three eight percent. That means the bond market expects inflation to average over two percent annually for the next decade. Investors aren’t betting on deflation; they’re betting on persistent, low-grade inflation. Luna: Which makes sense if you believe the service sector won’t let go of those margins easily. Lucas: It does. And consider the global context. The World Bank recently noted that capital availability isn’t the issue for ai driven industries, but borrowing costs are rising. This diverts investment away from labor-intensive sectors. If capital flows into automation rather than hiring, wage pressure remains soft. Luna: So we get fewer jobs, or lower-wage jobs, instead of the productivity boom that usually raises everyone’s standard of living. Lucas: Or a polarized labor market. High-skill tech roles pay well and drive innovation. Low-skill service roles pay poorly and face high turnover. The middle collapses. That’s why median usual weekly earnings are stuck around twelve hundred dollars. The average is pulled up by outliers, but the median worker sees little movement. Luna: Median is the better metric. It tells the story of the person sitting next to me. Lucas: It does. And that person is feeling the pinch of October. The PCE price index, the Fed’s preferred gauge, rose to one hundred thirty one point six. Core PCE is at one hundred thirty point five. Both are cooling, but slowly. The momentum is gone, but the level remains elevated compared to pre-pandemic norms. Luna: So we’re plateauing at a higher cost of living. Not getting worse, but not getting better. Lucas: That’s the plateau effect. And it’s dangerous because it lulls policymakers into thinking the problem is solved. But if your purchasing power hasn’t improved in eighteen months, you’re not solving anything for the consumer. Luna: What can individuals actually do? Can we negotiate our way out of this? Lucas: You can shift your consumption. Move away from services with high markup toward goods where competition is fierce. But also, focus on skill acquisition. In a stagnant wage environment, the only leverage you have is scarcity. Become indispensable in a niche. Luna: Practical advice. Don’t wait for the macro economy to fix itself. Lucas: Exactly. The macro forces are structural. Structural changes take years. Your career decisions are immediate. Luna: Before we dive deeper into how to hedge against this, I want to mention something. If walking through the economy with us has made something click, consider supporting the show directly. Lucas: Listener support keeps this ad-free and independent. You can find us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: It helps us keep digging into these numbers so you don’t have to guess. Lucas: Thanks. Now, back to the data. Let’s look at the UK comparison. They just cut energy bills and taxed banks in their new budget. It’s a different approach. Luna: Direct intervention vs. monetary policy. Does that help or hurt long term? Lucas: It’s short-term relief. By subsidizing energy, they lower the cost of living immediately. But taxing banks reduces capital supply. It’s a trade-off. We’re seeing similar pressures in the US, but we’re relying on the Fed to manage it via rates. Luna: And the Fed is hesitant to cut because they fear reigniting inflation. Lucas: Fearful, yes. But also confused. The data is mixed. Job openings are down, but quits are stable. Employers are holding onto workers despite higher costs. It’s a standoff. Luna: A stalemate. Which brings us back to the wage-price dynamic. Neither side is blinking. Lucas: Right. And until productivity spikes—usually driven by technology adoption—the status quo holds. AI is the wildcard. If it boosts productivity significantly, wages could jump without inflation. But we’re not there yet. Luna: So we watch and wait. Or we adapt. Lucas: We adapt. Because waiting for the perfect inflation print might mean waiting forever. The goal isn’t zero inflation; it’s purchasing power parity. Luna: Getting your raise to match the reality of your life. Lucas: Exactly. Until then, keep an eye on those service sector margins. They’re the barometer for your wallet. Luna: And check your own expenses. See where you can shift. Lucas: Smart move. Next week, we’ll look at how small businesses are navigating this same squeeze. Luna: Sounds like a tough topic, but necessary. Lucas: It is. Thanks for listening.