Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Still Beating Inflation But Barely
Transcript
- Lucas: So the May CPI came out this morning — 4.2 percent annual headline inflation. That's the highest reading in three years. And I think it's worth sitting with that number for a second, because we've been talking on this show for weeks about how wages are finally growing faster than prices. But today's data really tests that narrative. Luna: Yeah, I mean the headline number jumped. And it wasn't just base effects — month over month was also up. So what does that mean for the raise you might have gotten in the last year? Lucas: Right. So let's put the two numbers side by side. Average hourly earnings for private workers in May was $37.50, up from $37.41 the month before. That's about a 2.4 percent annualized growth rate if you look at the last few months. Meanwhile CPI is at 4.2 percent. So the gap is nearly 2 percentage points the wrong way. Luna: But wait — we've been citing that real wage growth turned positive earlier this year. What happened? Lucas: What happened is that inflation accelerated in the spring. If you go back to the first quarter, wage growth was running around 4.5 percent and CPI was closer to 3.5. So you had a positive real gap. But the May CPI print flipped that. Now you're looking at maybe 0.2 percent real wage growth if you're lucky. Luna: So basically we're back to treading water. Lucas: Exactly. And the employment cost index, which is a broader measure of total compensation including benefits, was at 177.5 for wages in Q1 — that's up about 4.3 percent year over year. But even that is now below the CPI print. So employers are paying more, but workers' purchasing power is barely holding. Luna: And the core CPI — ex food and energy — was at 336.1, up from 335.42. So core is still sticky. That's the part the Fed watches. Lucas: Yeah, core CPI annualized is still above 3 percent. And the breakeven inflation rate — that's the market's expectation for inflation over the next ten years — has actually ticked down to 2.33 percent. So the bond market thinks this spike is temporary. But for someone trying to budget right now, temporary doesn't feel temporary. Luna: Where is the inflation coming from specifically? Because we've talked about energy, rent, insurance. Is this broad-based or just a few categories? Lucas: It's broad enough to matter, but services are the real story. Core services excluding energy — things like rent, medical care, car insurance — those are still running hot. Goods inflation has actually moderated a bit as supply chains normalize. So the stickiness is in the service sector where wages themselves are a big input. Luna: And that's the classic wage-price spiral concern, right? If wages keep going up to keep up with prices, then businesses raise prices to cover higher labor costs, and it feeds on itself. Lucas: It is. But the data so far suggests that's not really happening on a broad scale. Unit labor costs are up, but productivity growth has been decent. So companies are absorbing some of the wage increases without fully passing them through. The bigger story is that inflation is coming from outside the labor market — from energy, from housing, from insurance. Luna: So what does this mean for the Fed? They've been on hold. Does a 4.2 percent CPI print make a rate cut this year less likely? Lucas: I think it pushes cuts further out. The market was pricing in maybe one cut in the second half of 2026. After this print, that probably gets pushed to early 2027. The Fed wants to see sustained evidence that inflation is returning to 2 percent. And today's number doesn't give them that. Luna: But if wages are only growing at 2.4 percent and inflation is at 4.2, that's a real squeeze. Doesn't that eventually slow consumer spending? Lucas: It should. And you're already seeing it in the data. The New York Fed survey from last week showed household worries over finances hit the highest level since July 2022. People feel squeezed. And when spending slows, that should help bring inflation down. It's the classic lag effect. Luna: So the good news is that wages are still going up. The bad news is that inflation is eating almost all of it. And the relief might not come until later this year or next. Lucas: That's the short version. And it's why the conversation around 'your raise' has to be more nuanced than just looking at the percentage increase. It's about what that raise can actually buy. And right now, for many people, it's buying about the same as last year. Luna: And if you're in a category where prices are rising faster — like rent or health insurance — you might actually be losing ground. Lucas: Absolutely. And that varies a lot by metro area, by industry, by age. We've done episodes on that. But the headline today is that the gap has reopened. Real wage growth has gone from positive to near zero. Luna: So for someone listening who's wondering 'should I ask for a raise or look for a new job?' — what's the takeaway? Lucas: I'd say the labor market is still tight enough that switching jobs can get you a bigger bump than staying. But don't expect that bump to feel as big as it did a year ago. And if you're staying put, make sure you understand what inflation is doing to your real income. Negotiate based on that. Luna: And if you're an employer listening — paying a competitive wage is more important than ever, because workers are feeling the pinch and they will move. Lucas: One more thing — the employment cost index we mentioned earlier. That's a lagging indicator. It reflects what employers actually paid in Q1. That number came in at 177.5, up about 4.3 percent year over year. So compensation costs are still rising. But if inflation stays at 4.2, even that 4.3 percent raise gets eaten up pretty fast. Luna: It's a tough environment. And it makes you appreciate when you find a resource that helps you make sense of it all without the noise. Lucas: Yeah, and that's actually a good point. You know, people often ask us how we keep this show ad-free and focused on the data. It's because of listeners who support us directly. If you find value in breaking down numbers like these every day, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: And it really does make a difference. Every contribution helps us stay independent and keep the analysis grounded. Lucas: So back to the broader picture — if you look at the PCE price index, which is the Fed's preferred measure, that came in at 130.9 for April, up from 130.38. Core PCE at 129.6. So the trend is similar: inflation is still above target, and until it comes down, real wage gains will be hard to come by. Luna: And the May jobs report is out Friday. That will give us another piece of the puzzle. Lucas: Exactly. We'll be watching wage growth in that report closely. If average hourly earnings tick up again, it could signal that the labor market is still too hot for the Fed to ease. But if they moderate, it might give the Fed some cover. Either way, the next few months are critical. Luna: And for now, the takeaway is: your raise is still beating inflation, but just barely. So keep an eye on those real numbers. Lucas: That's the bottom line. Thanks for being here — we'll dig into the jobs report on Friday.