Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Wage Growth Feels Slower Than Inflation
Transcript
- Lucas: So the June CPI data came out on Tuesday — headline inflation at 3.5 percent year-over-year, down from 3.6 percent in May. The market basically shrugged. S&P 500 barely moved. But here's the thing: I keep hearing from people who say their personal inflation rate feels nowhere near 3.5 percent. And I think they're right. Luna: You mean the gap between what the CPI says and what people actually experience? Lucas: Exactly. The CPI is a national average of a fixed basket of goods. But your personal basket — what you actually spend money on — can look very different. And right now, the categories that are still running hot are the ones that dominate most household budgets: housing, insurance, services. Luna: Let's look at housing. Rents are still rising faster than overall CPI. I mean, we did a whole episode on that, but it's worth revisiting because the gap is persistent. Lucas: Right. The CPI measure for rent of primary residence was up about 5 percent year-over-year in June. That's a full 1.5 percentage points above headline inflation. And for homeowners, the owners' equivalent rent measure — which is basically what you'd pay to rent your own home — is also running around 5 percent. Luna: So if you're a renter, your biggest expense is going up at 5 percent, while the average CPI says 3.5. That's a significant gap right off the bat. Lucas: And it doesn't stop there. Car insurance premiums are still climbing at double-digit rates in many states. Medical services are up around 4 percent. Education costs, too. These are the categories that hit middle-class households hardest. Luna: Meanwhile, wage growth — the average hourly earnings number we get in the jobs report — is running around 4 percent year-over-year. So on paper, wages are outpacing inflation. But in practice, if your personal inflation rate is closer to 5 or 6 percent, that 4 percent raise is actually a pay cut. Lucas: That's the paradox. The national averages say real wages are growing modestly. But for a lot of people, real wages are still shrinking. And the Fed pays attention to the PCE price index, not CPI. PCE is running a bit higher — the May reading was up 4.1 percent year-over-year. But even that might understate the squeeze for households that rent, drive a car, and have kids in school. Luna: So who is the CPI actually accurate for? Is it just retirees who own their homes and don't drive? Lucas: Pretty much. If you're a homeowner with a fixed-rate mortgage, no car payments, and you're on Medicare, your personal inflation rate might be below 2 percent. But if you're a young renter in a city with a car commute and private health insurance, you could be facing 6 percent or more. Luna: And the Fed is setting interest rates based on these broad averages. So there's a mismatch between policy and lived experience. Lucas: Exactly. The fed funds rate is at 3.63 percent right now, effectively flat for months. The Fed has signaled they might cut later this year if inflation continues to ease. But if your personal inflation is 5 percent, a rate cut isn't going to help your rent or your insurance premium. It might actually make things worse if it reignites demand. Luna: Let's talk about the wage side a bit more. You mentioned average hourly earnings at 4 percent. But that's an average. What about the distribution? Are lower-income workers seeing bigger raises? Lucas: Actually, the Atlanta Fed's wage growth tracker shows that wage gains have been strongest at the bottom of the income distribution over the past couple of years. That's partly due to minimum wage increases and a tight labor market for service workers. But those gains are being eaten up by rent and food inflation, which hit lower-income households harder because they spend a larger share of their income on those basics. Luna: So the people who need wage growth the most are the ones getting squeezed the most by the categories where inflation is stickiest. Lucas: Right. And that's why the disconnect between headline CPI and personal experience matters. It's not just a statistical quirk. It shapes how people feel about the economy, their financial decisions, their political views. If you tell someone 'inflation is down to 3.5 percent' and they just saw their rent go up 8 percent, they think you're gaslighting them. Luna: And they have a point. The CPI is a useful tool for macroeconomic policy, but it's a terrible measure of individual cost of living. Lucas: Look, the Bureau of Labor Statistics does a good job with the methodology. They're not trying to mislead anyone. But the CPI was never designed to measure your personal inflation rate. It measures the average change in prices for a fixed basket of goods and services. Your basket is different. And when the composition of spending shifts — like when rent takes up a bigger share — the average becomes less representative. Luna: There's actually a tool called the 'CPI for All Urban Consumers' versus 'CPI for Urban Wage Earners and Clerical Workers' — the second one has a different weighting. It's usually a bit higher. Lucas: That's right. The cpi w, which is used to calculate Social Security cost of living adjustments, does tend to run a bit higher than the headline cpi u. So even the government acknowledges that different groups face different inflation rates. Luna: But your average listener isn't getting a COLA based on cpi w. They're getting a raise from their employer, if they're lucky. And that raise is often based on what the company thinks is competitive, not on the actual cost increases the employee is facing. Lucas: And here's a practical tip: next time you're negotiating a raise, don't just cite the CPI. Bring up your specific cost increases — rent, insurance, childcare. Employers are more likely to respond to real numbers from your life than to a government statistic. If your rent went up 8 percent, that's a concrete data point. Luna: That is actually a really good point. I've never thought of framing it that way in a negotiation. Lucas: It shifts the conversation from 'I want more money' to 'my cost of living has gone up this much, and I need my compensation to keep pace'. It's harder for an employer to argue with your actual rent bill. Luna: So if today was actually useful to you, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. It helps us keep doing deep dives like this without sponsors. Lucas: Yeah, we really appreciate those who throw in a coffee now and then. It makes a difference. And speaking of useful — let's come back to that PCE versus CPI gap for a second, because it actually matters for your investment decisions. Luna: How so? Lucas: The Fed targets PCE, not CPI. PCE has been running higher than CPI — 4.1 percent in May versus 3.5 percent in June. That means the Fed might be more cautious about cutting rates than the CPI alone would suggest. And if rates stay higher for longer, that affects everything from mortgage rates to bond yields to stock valuations. Luna: So the 'soft landing' narrative might be a bit premature if the Fed's preferred inflation gauge is still above 4 percent. Lucas: Exactly. The market is pricing in a cut in September. But if PCE doesn't cooperate, that could get pushed back. And that's why it's important to look beyond the headline CPI number everyone talks about. Luna: So what should a listener do with this information? Beyond the salary negotiation tip, I mean. Lucas: Track your own spending. Calculate your personal inflation rate. There are simple spreadsheets online, or you can just look at your bank statements from a year ago and compare big categories. If you're seeing 6 percent, you need to adjust your budget and your expectations accordingly. Don't let the macro headlines lull you into thinking everything is fine. Luna: And maybe consider investments that hedge against inflation, like TIPS or I bonds, if your personal rate is high. Lucas: That's a good call. I bonds are currently yielding around 4.3 percent, which isn't bad if your personal inflation is 5 or 6. It's not a perfect hedge, but it's better than cash. The key is being aware of the gap between the official story and your own reality. Luna: Alright, I think that's a solid place to leave it. Next episode, we'll look at how the World Cup boost for bars and restaurants might be masking some consumer weakness. Lucas: Looking forward to it. Thanks for listening, everyone.