Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Gets Eaten by Energy Costs
Transcript
- Lucas: So we keep hearing that wages are finally outpacing inflation. And the data backs that up — average hourly earnings ticked up again in April, now sitting at $37.40. Core PCE inflation, the Fed's preferred measure, is at 3.3% annually. On paper, workers are gaining ground. Luna: Right, but I think a lot of people would laugh if you told them their paycheck feels bigger. What's the disconnect? Lucas: The disconnect, I think, is energy costs. Because while the headline wage number looks good, energy inflation has been stubbornly persistent. And it hits households in a very visible way — at the pump, on the heating bill. Luna: And there's the Iran war factor. CNBC just reported the average household is paying about $450 more per year on gas and energy because of that conflict. That's a real number. Lucas: Exactly. That $450 is essentially a tax on every paycheck. If your raise was, say, 3% on a $60,000 salary, that's $1,800 before taxes. But after that $450 energy hit, you're left with $1,350 — and then other costs like rent and groceries also rose. So the raise feels like nothing. Luna: It's like the raise arrives in one pocket and leaves through the other. And energy is a non-negotiable expense for most people. Lucas: That's the key word — non-negotiable. You can maybe delay buying a new TV, but you have to fill your tank and heat your home. So energy inflation acts like a hidden tax that disproportionately hits lower-income households, because energy makes up a bigger share of their spending. Luna: And the Fed's preferred inflation gauge, core PCE, excludes food and energy specifically to get at underlying trends. So when the Fed says inflation is moderating, they're looking at a number that doesn't include the thing hurting consumers most. Lucas: Right. And the 10-year breakeven inflation rate, which is a market-based measure of expected inflation, is at 2.38% — basically right around the Fed's target. So markets expect inflation to stay sticky but not explode. But that average masks a lot of pain in specific categories. Luna: So if energy costs are the culprit, what can actually be done? The Fed can't drill for oil. This is more of a geopolitical supply shock than a demand-driven inflation. Lucas: Exactly right. And Fed officials have acknowledged that. Kashkari said recently that the inflation fight takes priority and the labor market is in decent shape. Goolsbee noted energy inflation has been more persistent than expected. So the Fed is likely to keep rates higher for longer, which means borrowing costs stay high — mortgages, car loans, credit cards. Luna: Which then puts more pressure on household budgets. It's a feedback loop. Lucas: It is. And that's why the real wage gains we see in the data don't translate to consumer confidence. The Michigan sentiment survey hit a record low recently, despite a strong labor market. People feel squeezed even if their nominal income is up. Luna: So the question is: will this energy shock pass once the Iran situation stabilizes? Or are we looking at a longer-term shift in energy prices? Lucas: That's the multi trillion dollar question. Historically, geopolitical energy shocks tend to fade once supply routes normalize. But if the conflict drags on, or if it leads to sustained higher risk premiums on oil, then energy costs could stay elevated. And that would mean the wage gains we're celebrating might remain invisible to the average worker. Luna: It's a reminder that the macro numbers we talk about — averages, indexes — they don't capture the experience of filling up your car or paying your utility bill. Lucas: Right. And that's the whole point of this show — to bridge that gap between the data and the lived reality. Speaking of which, if you find these conversations useful, we keep the show ad-free and accessible because of listeners who chip in a couple of dollars a month. It genuinely makes a difference — buy me a coffee dot com slash fexingo, if you've gotten something out of it. Luna: Yeah, it's a small way to keep this going. And we really appreciate it. Lucas: So back to energy — one thing I've been watching is the core PCE services inflation, which is still running hot. That's the part the Fed is most focused on, because it's tied to domestic labor costs and is less likely to fade quickly. Luna: And if services inflation stays sticky, that could keep overall inflation above target even if energy eventually cools. So the Fed has to balance both. Lucas: Exactly. And that's why the next few months are crucial. If energy prices start to decline later this year, we might finally feel that raise. But if they stay high, then the wage-price story remains one of frustration rather than recovery. Luna: So for now, the advice might be: don't count your raise until you've filled your tank. Lucas: That's probably the most practical takeaway. Thanks for listening, and we'll be back with more on Wednesday.