Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Wage Growth Fuels Modern Stagflation
Transcript
- Lucas: The number that keeps me up at night right now isn't the S&P five hundred hitting seven thousand eight hundred. It's the average hourly earnings for private workers sitting at thirty-seven point eight dollars as of early September. Luna: That sounds like a victory for employees until you look at what those wages are actually buying in the services sector. Lucas: Exactly. Because when you pair that thirty-seven dollar eighty figure with a core CPI reading of three hundred thirty-seven point eight, you start seeing the mechanics of modern stagflation. We have wage growth that is sticky, but real GDP growth has already decelerated to two point two percent annualized. Luna: So companies are facing higher labor costs while demand is simultaneously softening, which forces them to raise prices just to maintain margins. Lucas: Precisely. And this is where it differs from the supply shock episodes we covered earlier. This isn't about oil prices or shipping containers. This is a balance sheet problem for corporations. They are absorbing less margin pressure because the labor market hasn't fully cooled despite job openings dropping to seven thousand seventy-nine thousand. Luna: It feels like the labor market is sending mixed signals. Unemployment ticked up to four point two percent, but initial claims are still low at one hundred ninety-seven thousand. Lucas: Right, and that ambiguity is exactly why inflation expectations are ticking back up. The Fed survey shows one-year outlook hitting levels not seen since mid-two thousand twenty-three. Workers see their names on paychecks going up, so they resist price hikes, but businesses see their cost base hardening. Luna: Does this mean the Fed is trapped? If they cut rates to help growth, they risk igniting wage demands further. Lucas: They are absolutely trapped. Look at the ten-year breakeven inflation rate holding flat at two point three six percent. Markets aren't pricing in hyperinflation, but they aren't pricing in a clean disinflation path either. They are pricing in a grind. Luna: A grind where productivity doesn't rise fast enough to offset the wage increase. Lucas: That is the key. In the nineties, productivity spikes helped neutralize wage pressures. Today, with AI investment masking real stagnation as we discussed last week, we haven't seen that efficiency gain translate to lower unit labor costs yet. Luna: So businesses are essentially paying more for the same output, which means every product they sell needs a slightly higher price tag just to break even. Lucas: Yes, and notice how the trade deficit hit one hundred five point six billion dollars recently. When domestic costs rise, imports become relatively cheaper, but if global supply chains are also dealing with their own inflationary pressures, that arbitrage window narrows. Luna: It reminds me of the seventies, but without the explicit oil embargo driving the narrative. Here, the driver is purely internal labor dynamics. Lucas: Very true. The seventies had external shocks. This is endogenous. It is baked into the employment contracts and the service sector pricing models. Consider that nonfarm payrolls only added twenty nine thousand last month. That is barely above replacement level for a growing population. Luna: Yet wages are still climbing. How do you reconcile slow hiring with faster pay? Lucas: Because the remaining workers are negotiating harder. When job openings fall from over seven thousand three hundred to seven thousand seventy-nine, the desperation on both sides changes. Employers offer premium wages to secure talent because they cannot easily replace them. Luna: Which creates a feedback loop. Higher wages lead to higher prices, which leads to higher wage demands. Lucas: That is the classic wage-price spiral, though economists prefer the term 'sticky services inflation.' The PCE price index rose to one hundred thirty-one point six, driven largely by shelter and healthcare costs where labor is dominant. Luna: It seems like the consumer is bearing the brunt of this adjustment. Real incomes might be stagnant even if nominal income rises. Lucas: Spot on. If your paycheck goes up three percent but your grocery bill and insurance go up four percent, you are effectively poorer. That reduction in real purchasing power dampens consumption, which feeds back into slower GDP growth. Luna: So we get the worst of both worlds. High prices and weak growth. Lucas: And central banks hate it because standard tools are blunt. Raising rates fights inflation but exacerbates the growth slowdown. Lowering rates helps growth but risks entrenching the inflation expectations we saw in that recent Fed survey. Luna: Is there any historical precedent for breaking this cycle without a recession? Lucas: The eighties required a severe recession to break the back of inflation. But today, the debt to gdp ratios are much higher. A deep recession could trigger sovereign debt issues we haven't fully mapped out yet. Luna: So maybe the answer isn't monetary policy but fiscal discipline or structural reforms to boost productivity. Lucas: Potentially. But those take years to implement. In the short term, we are stuck navigating this narrow corridor. The IM chief noted AI is both hope and hazard, and I think she is referring to this exact tension. Luna: If AI boosts productivity, it lowers costs. If it displaces workers, it creates social unrest that demands higher wages. Lucas: Exactly. Until that productivity boom hits the bottom line of the average corporation, we are likely to see this wage-driven inflation persist. Luna: It makes watching the weekly jobs report so stressful. Every number feels like a verdict on where prices are heading next quarter. Lucas: Agreed. So, if walking through these economic crosscurrents with us has made something click regarding how your own budget fits into this macro picture... Luna: Remember that small contributions genuinely keep the research running. You can support the show directly at buy me a coffee dot com slash fexingo. Lucas: It helps us dig deeper into these data sets rather than relying on surface-level headlines. Thanks for keeping the lights on. Luna: Now, back to that trade deficit. Does the widening gap signal that consumers are finally pulling back? Lucas: It’s complicated. A wider deficit usually means Americans are buying more foreign goods because domestic ones are too expensive due to those labor costs. Luna: Or it means global competitors are becoming more efficient while we are bogged down by our own internal pricing structures. Lucas: Both are happening. And as India’s central bank hikes rates to combat similar inflation risks, global capital flows are shifting, adding another layer of complexity to our currency valuation. Luna: So the stagflation puzzle isn't just domestic. It's increasingly global. Lucas: Right. And that suggests the solution requires international coordination on supply chains and labor standards, not just a Fed interest rate decision. Luna: Which brings us back to the original question: who wins in this environment? Is it the saver, the spender, or the investor? Lucas: That depends entirely on whether you hold assets that appreciate with inflation or liabilities that do not. But that is a conversation for another day. Luna: For now, we just watch the numbers and wait for the trend to clarify. Lucas: Exactly. One data point at a time.