Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The $450 Iran War Tax on Your Paycheck
Transcript
- Lucas: Alright, let's talk about the elephant in the room — the Iran war and what it's actually doing to your paycheck. CNBC ran a number Friday that stopped me cold: the average U.S. household is now paying about $450 more per year on gas and energy because of this conflict. Luna: $450 — and that's per household, not per person. That's real money. Lucas: Right. Now, here's why this matters for our show: we've been tracking whether wages are finally outpacing prices. And for the first time in years, the data was starting to look decent. Average hourly earnings in the private sector hit $37.40 in April, up from $37.35 the month before. That's a nickel. But core PCE — the Fed's preferred inflation gauge — came in at 3.3% annualized again this week. Luna: So that nickel is getting eaten. Fast. Lucas: Exactly. And the energy piece is the new wildcard. Before the Iran escalation, energy inflation was already stickier than the Fed expected. Chicago Fed President Goolsbee said as much on Thursday — energy inflation has been 'more persistent than expected.' Then you add a geopolitical supply shock on top of it. Luna: Let me play that back in real-world terms. If you're a worker making the median weekly wage of $1,204 — that's about $62,600 a year — $450 is roughly 0.7% of your gross income. That's not nothing. Lucas: No, it's not. And for lower-income workers, it's a much bigger bite because energy costs eat a larger share of their spending. The Employment Cost Index for wages rose to 177.5 in the first quarter of this year. That's a 0.7% quarterly increase. So the $450 energy surcharge basically wipes out an entire quarter's wage growth for a lot of people. Luna: You're saying the raise from January to March? Poof. Gone to the gas pump. Lucas: That's the story. And what I find interesting is that the market is brushing this off. The S&P 500 hit 7,580 Friday, up 1.4% on the week. The Nasdaq is up 2.4%. There's this disconnect between what financial markets are pricing in — which is basically a 'this too shall pass' view — and what households are experiencing at the pump and the grocery store. Luna: Right, because the market looks forward. But workers live in the present. And right now the present has core PCE at 3.3%, which is still well above the Fed's 2% target. Lucas: Minneapolis Fed President Kashkari said Thursday that the inflation fight takes priority because the labor market is 'in decent shape.' So the Fed is signaling: we're not cutting rates until inflation is truly tamed. But here's the tension — the labor market is decent, but it's not booming. Wage growth is modest. And now you've got this external shock. Luna: Let me ask you this: is the $450 number the full story? Because energy feeds into everything — transportation, manufacturing, agriculture. The indirect costs could be higher. Lucas: That's the key point. The $450 is direct household spending on gas and home energy. But think about what happens when shipping costs go up because diesel is more expensive. Those costs get passed through to the price of food, consumer goods, everything. So the actual hit to purchasing power is probably larger. The question is how much larger and how long it lasts. Luna: And whether employers will factor that into next year's raises. If companies see higher input costs from energy, they may be less willing to give big wage increases. Lucas: Bingo. That's the second-order effect. Right now, wage growth is still positive in real terms if you look at the headline numbers — average hourly earnings up 3.9% year over year, inflation at 3.3% on core PCE. But that gap is razor-thin. And if energy stays elevated, that gap could flip negative. Luna: And we haven't even talked about what happens if the conflict widens. Oil prices could spike further. Lucas: Yeah, and that's the risk the market is maybe underestimating. The ten-year breakeven inflation rate is sitting at 2.39%, basically flat. That suggests bond traders don't see a lasting inflation surge. But they've been wrong before. Luna: You know, talking through this — it's the kind of thing that makes you appreciate having a clear framework for thinking about your own finances. Honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It helps us keep doing this, ad-free, with no sponsors telling us what to say. Lucas: Yeah, we keep it independent. If you find value in breaking down how the economy actually hits your wallet, that's the way to support it. And we're grateful for those who do. Luna: Back to the numbers — one thing I want to dig into: the 'double scar' that CNBC mentioned. Past inflation trauma plus current geopolitical shocks. How does that affect consumer behavior? Lucas: It's a great phrase. The idea is that consumers who got burned by the 2021-2022 inflation spike are now hypersensitive to any price increase. So even a modest energy shock might cause them to pull back spending more than the raw numbers would justify. That could slow the economy faster than expected. Luna: Which then becomes a self-fulfilling prophecy for the Fed. If consumers stop spending, the economy weakens, and the Fed might cut rates even with inflation above target. Lucas: Exactly. That's the tricky part. Kashkari said inflation fight takes priority. But if consumer sentiment collapses — and it already hit a record low earlier this year — the Fed may face pressure to pivot. The Michigan sentiment index was at historic lows in the spring. Luna: And that's before the $450 energy tax really sinks in. Most households probably haven't fully felt it yet. It takes a couple of months of higher gas prices to adjust. Lucas: Right. So we're kind of in this waiting period. The data we have is through April. The April CPI reading was 332.4, up from 330.29. That's about 0.6% monthly. Core CPI was 335.4, up from 334.17. So inflation is running at about 3% annualized on CPI. Energy is a big part of that. Luna: Let's bring it back to the worker. If I'm listening and I just got a 3% raise this year, but my gas and heating costs are up 10% due to the war, I'm underwater on that part of my budget. What's the play? Lucas: The play is to understand that this is likely temporary — assuming the conflict doesn't escalate further. But temporary can last a while. The best thing workers can do is build a buffer. If your raise is getting eaten by energy costs, you need to find other places to cut or negotiate harder next year. Luna: Or look for jobs in sectors that are less exposed to energy prices. Healthcare, education, tech — those tend to be less energy-intensive. Lucas: That's a smart angle. And it ties back to something we talked about in episode 6 — how the wage-price gap varies by occupation. Some jobs are more insulated from these shocks than others. Luna: So the takeaway for today: your raise is real, but there's a new tax on it. A geopolitical tax. And it's about $450 a year. Lucas: That's the number to remember. And we'll keep watching the data — next month's CPI and PCE readings will tell us whether this is a blip or a trend. For now, the key is to not let it catch you off guard. Luna: Thanks, Lucas. And for those who want to support the show, you know the drill — buy me a coffee dot com slash fexingo. Lucas: We'll be back tomorrow with another angle. Stay sharp.