Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Energy Prices Are Stealing Your Raise
Transcript
- Lucas: So the May CPI came in at 4.2 percent annual inflation yesterday. That's the highest print in three years. And if you look at what drove it, it's almost entirely energy. Luna: Right, the headline number everyone was bracing for, and it was even a tick above what economists expected. Lucas: Exactly. And then today we got the PPI — wholesale prices — which rose 1.1 percent in May alone, also above forecasts. Again, energy was the culprit. Luna: So let's connect this to wages. We've been talking for weeks about how real wage growth finally turned positive. Is this the moment it gets reversed? Lucas: Potentially. Average hourly earnings for private workers hit $37.50 in May, up from $37.41 the month before. That's a roughly 0.24 percent monthly gain. But CPI rose 0.3 percent in May — so on a monthly basis, you're already behind. Luna: And that's before you factor in the PPI spike, which usually takes a month or two to show up at the consumer level. Lucas: Right. The PPI number is a leading indicator. If wholesale costs go up that much, retailers and service providers either eat the margin or pass it through. Given the pricing power we've seen, they're passing it through. Luna: So the raise you got in May is already being eaten by higher prices before you even feel it. Lucas: That's the concern. And look, the energy piece is really specific here. The 10-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, ticked up to 2.34 percent. That's still below the current CPI, but it suggests the market thinks this isn't a one-month blip. Luna: And we saw the ECB hike rates today for the first time since 2023, explicitly because of energy cost pressures from the Iran war. So this is a global thing. Lucas: It is. Europe is getting hit even harder because they're more exposed to energy imports. But here in the US, we're feeling it at the pump, in heating bills, and in the cost of pretty much anything that gets transported. Luna: So where does that leave the worker who just got a 3 percent annual raise? They're seeing 4.2 percent inflation and potentially more coming. Lucas: Yeah, it's a squeeze. And it's why I keep coming back to this: the wage numbers we track — average hourly earnings, median weekly earnings, the employment cost index — they're all moving in the right direction. But velocity matters. If inflation accelerates faster than wages, you're losing ground. Luna: And we have to be honest — the employment cost index for wages was at 177.5 in Q1, up from 176.23. That's a 0.7 percent quarterly gain. Annualized, that's about 2.8 percent. So wage growth is around 3 percent. Inflation is 4.2. Math is brutal. Lucas: It is. And that's why this episode is important to get out there. If walking through the economy with us has made something click, we want you to know that we deliberately don't run ads on these episodes. No sponsors, no interruptive commercials. It's just the two of us digging into the numbers. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep this independent and free for everyone. Appreciate anyone who does. Lucas: Okay, back to the data. So the core CPI, which strips out food and energy, was 336.1 in May, up from 335.42. That's a 0.2 percent monthly increase. So ex-energy, inflation is actually fairly tame. Luna: Which tells you that the energy spike is the story. Without it, we'd be looking at a much more benign inflation picture — and real wage gains would be intact. Lucas: Exactly. The PCE price index, which is the Fed's preferred measure, came in at 130.9 for April, up from 130.38. Core PCE at 129.6. Those are also relatively modest moves. So the Fed is in a tough spot — do they react to the headline energy spike, which might be transitory if the Iran situation de-escalates, or do they hold steady? Luna: And we've seen the market reaction. The S&P 500 is basically flat over the last five days. The Dow down a tick. But the Russell 2000, which tracks small caps, is up 2.5 percent. So maybe investors think this is a large-cap energy shock but small businesses can still grow. Lucas: Interesting. Small caps tend to be more domestically focused, so they're less exposed to global energy supply chains. But they also face higher input costs directly. So that Russell gain might be a bit of a head-scratcher. Luna: Or maybe it's a bet that the Fed doesn't overreact. The ECB hiked, but the Fed might wait and see. Lucas: Right. And the breakeven inflation rate we mentioned — 2.34 percent — is still well anchored. So the bond market isn't panicking. That gives the Fed cover to stay patient. Luna: So what's the bottom line for workers? Should they expect their real wages to shrink in the second half of 2026? Lucas: It depends on whether energy prices stay elevated. If the conflict in Iran widens, we could see oil spike further, and then yes, you'll see it in CPI for months. But if it stabilizes, then the wage gains we saw in Q1 and Q2 could resume. Luna: So basically, your raise is hostage to geopolitics. Lucas: Unfortunately, yes. The labor market is actually pretty solid. Job openings are still high, unemployment is low. Wages are growing. But if the energy sector keeps throwing curveballs, it doesn't matter how good your raise looks on paper. Luna: And that's the real story here. It's not that wages are failing — it's that external shocks are undermining them. Lucas: Exactly. And we'll keep tracking it. Next week, we'll look at how specific industries are adjusting their compensation in response to this energy-driven inflation. Some sectors are already talking about cost of living adjustments tied to local energy indices. Luna: That's a smart angle — because energy costs vary wildly by region. If you're in Texas versus New England, the impact is totally different. Lucas: Right. And that's the kind of granularity that gets lost in the national averages. So we'll dig into that. For now, keep an eye on the gas station and your heating bill — that's where your raise is going. Luna: And maybe buy your host a coffee at the link if this helps you make sense of it all. Lucas: Exactly. We'll talk next week.