Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Energy Inflation Is Quietly Reshaping Your Paycheck
Transcript
- Lucas: Luna, I want to talk about something that's been quietly eating into paychecks for months now, and it's not rent. It's energy. Luna: Yeah, I've been feeling it at the pump. But is it really that big a slice of the average budget? Lucas: It's bigger than most people realize. A CNBC report from this week says the average U.S. household is paying an extra $450 on gas and energy directly tied to the Iran conflict. That's not a rounding error — that's a meaningful chunk of a typical monthly raise. Luna: And we just saw core PCE hit 3.3% annualized in April — that's the Fed's preferred gauge. So energy is propping up that number. Lucas: Exactly. The core reading — which strips out food and energy — actually came in as expected. But energy itself has been more persistent. Fed's Goolsbee said this week that energy inflation has been 'more persistent than expected.' And when energy is sticky, it creates a floor under overall inflation that wage growth has to climb over. Luna: If walking through the economy with us has made something click for you, there's a simple way to keep this show ad-free and independent. You can support us at buy me a coffee dot com slash fexingo. Lucas: We put a lot of work into digging into these numbers, and listener support is what makes that possible. No pressure, but if you get value from it, that link is there. Luna: Alright, back to energy. So how much of that $450 is actually hitting the average worker? Lucas: Well, let's look at the wage data. Average hourly earnings for private workers in April were $37.40, up from $37.35 the month before. That's about a 0.13% monthly gain — roughly $5 a week before taxes. So the extra energy cost essentially wipes out that entire increase for a lot of households. Luna: So your raise is going straight to the gas tank or the heating bill. Lucas: Pretty much. And it's worse for lower-income households, because energy is a larger share of their spending. For someone earning the median weekly wage of $1,204, that $450 a year is about 0.7% of gross income. But if you're earning minimum wage or near it, it's more like 2-3%. Luna: Right, because you can't easily cut back on commuting to work or keeping the lights on. Lucas: Exactly. And this isn't just gas. It's also the cost of goods that are energy-intensive to produce and transport. So even if you're not driving much, you're still paying more for everything else. Luna: Let's talk about the Fed's dilemma. They're trying to fight inflation, but the energy piece is largely outside their control — it's geopolitical. Lucas: Kashkari said this week that the inflation fight takes priority, even though the labor market is 'in decent shape.' The problem is that if they keep rates high to cool demand, they risk slowing the economy unnecessarily, because the inflation they're fighting is supply-driven, not demand-driven. Luna: And meanwhile, workers are seeing their real wages stagnate. Core PCE at 3.3% means prices are still rising faster than the average wage increase of around 4% nominal. So real wage growth is barely positive. Lucas: Barely positive is generous. If you strip out energy costs from the CPI basket, real wages are probably negative for a lot of people. The headline CPI for April was 332.4, up from 330.29 in March. That's about 0.64% monthly inflation. Average hourly earnings grew less than 0.2% in that same period. So purchasing power is eroding month by month. Luna: And this has been going on for a while. The Iran war started earlier this year, and the energy shock has been persistent. It's not a one-month blip. Lucas: No, it's structural now. The 'double scar' that CNBC mentioned — the lingering trauma of the 2021-2022 inflation spike plus the new geopolitical shock — is making consumers really pessimistic. Consumer sentiment hit a record low even though the job market is strong. Luna: So what can workers do? Switch jobs for a bigger raise? That used to be the playbook. Lucas: It still works for some. Job switchers are seeing wage gains of 5-6% compared to 3-4% for stayers. But if you're in an industry that's energy-sensitive — manufacturing, transportation, retail — your employer's margins are squeezed too, so they're less willing to give big raises. Luna: And the service sector? A lot of those jobs are in person, requiring commuting. Lucas: Right. Service workers — hospitality, healthcare, personal care — are some of the most exposed. They have to show up, they can't work remotely, and they're often paid hourly. So that $450 a year hits them harder, and they have less bargaining power. Luna: Let's look at the wage data by industry if we have it. Do we know which sectors are seeing the fastest growth? Lucas: Unfortunately, the most recent hourly earnings data is aggregate. But the median weekly earnings figure from early 2025 — $1,204 — is up about 3.9% from the prior year. That's roughly in line with overall inflation, but again, energy is the wildcard. If energy keeps rising, that 3.9% nominal gain gets eaten up. Luna: So the Fed is stuck. They can't lower rates without risking higher inflation, but keeping rates high hurts the labor market eventually. Lucas: Exactly. And the market is pricing in rate cuts later this year, but if energy stays elevated, the Fed might have to hold. The S&P 500 hit 7,580 this week, up 1.4% in five days, so investors are optimistic, but that optimism could be fragile if energy costs don't ease. Luna: So what would need to happen for energy inflation to come down? A ceasefire in Iran? Lucas: That would help. Oil prices would likely drop, and gas prices would follow. But even then, the supply chain disruptions take months to unwind. And there's the possibility that the conflict broadens, which would push prices higher. Luna: So in the meantime, workers are stuck between a raise that looks good on paper and a real cost of living that keeps climbing. Lucas: That's the takeaway. Your raise is real, but energy is quietly stealing it. And until the geopolitical picture stabilizes, that's likely to continue. Luna: It's a tough spot. Thanks for breaking down the numbers, Lucas. Lucas: Always. We'll keep watching those energy prints and the wage data. Next week, we'll look at how housing costs are finally starting to cool — or not.