Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Actually Beating Core Inflation Now
Transcript
- Lucas: So the CPI headline this month was ugly — 4.2 percent annual inflation, the highest in three years. But when you look under the hood, there's actually a pretty important story about wages that most coverage is missing. Luna: Okay, I'm ready for the good news because the headlines have been brutal. What are we missing? Lucas: The headline number is being dragged up almost entirely by energy. Core CPI — which strips out food and energy — came in at 2.5 percent annualized in May. That's down from 2.8 percent in April. Meanwhile, average hourly earnings for private workers rose to $37.50 in May, up 3.7 percent year-over-year. Luna: So if you strip out the gas station and the grocery store, your paycheck is actually growing faster than the prices you're paying? Lucas: Exactly. Real wage growth relative to core prices is now positive for the first sustained stretch since early 2021. The Employment Cost Index — which is the Fed's preferred measure — shows wages up 4.1 percent in the first quarter. And the core PCE price index, which the Fed targets, is running at just 2.8 percent annualized. Luna: That's a meaningful gap. But I feel like nobody talks about it because the energy number is so in-your-face at the pump. Lucas: Right, and that's the tension. The ten-year breakeven inflation rate — basically the bond market's expectation for average inflation over the next decade — ticked up to 2.31 percent this week. So markets expect energy to eventually fade, but in the short term, it's eating up a lot of the headline wage gain. Luna: So for the average worker, the experience depends on what you buy. If you drive a lot, your raise feels smaller. If you're mostly paying for rent, healthcare, and services, your raise is actually stretching further. Lucas: That's exactly right. And the data backs it up. Shelter costs are still elevated but moderating. Medical care services actually declined in the latest CPI print. Used car prices are down. The things that eat up most of a typical household budget — housing, healthcare, education — are seeing slower price growth than energy. Luna: Which brings us to the ECB — they hiked rates this week for the first time since 2023, specifically because of energy-driven inflation from the Iran situation. Do you think the Fed follows? Lucas: It's a tough call. The Fed has been in a holding pattern, and Chair Powell has said they can look through energy spikes if they're transitory. But the ECB's move signals that central banks globally are worried about second-round effects — if energy costs push up wages and then prices across the board. Luna: And we've seen wholesale prices surge 1.1 percent in May, also on energy. So there's a pipeline concern. Lucas: For sure. But here's what I find interesting: the market reaction to the CPI print was relatively muted. The S&P 500 is up 0.3 percent this week, and the Russell 2000 — which tracks smaller, more domestic companies — is up over 3 percent. That suggests investors think the core story is intact. Luna: So the narrative that your raise is getting eaten by inflation might be too simplistic. It's really getting eaten by energy, specifically. Lucas: Right. And look, if walking through the economy with us has made something click, I want to mention something quick. This show deliberately doesn't run ads. We think that's worth preserving — no insurance pitches, no mattress commercials interrupting the data. Luna: Yeah, that's something we're both pretty committed to. It keeps the conversation clean. Lucas: If that matters to you, the link to support the choice is buy me a coffee dot com slash fexingo. No pressure, just if you want to keep this ad-free. Luna: Alright, back to the numbers. So if core inflation is cooling and wages are still growing, does that change how we think about the Fed's next move? Lucas: I think it supports the case for a pause. The Fed's dual mandate is price stability and maximum employment. The labor market is still tight — we saw JOLTS job openings ticking up again. But if wage growth is slowing relative to core inflation, the risk of a wage-price spiral diminishes. Luna: Though we have to be careful — the PCE data lags CPI by a month. The April core PCE came in at 2.8 percent, but the May CPI core was 2.5. So the PCE for May, which we'll get in a few weeks, could be lower. Lucas: Exactly. And that's why the Fed will wait. They have the July meeting, and by then they'll have May PCE and June CPI. If both show core inflation continuing to cool, they can hold steady even with the energy spike. Luna: One thing I want to bring up — median usual weekly earnings hit $1,204 at the start of 2025. That's up from $1,159 a year earlier. But that data is from January, so it's a bit stale. The more current hourly data is more useful. Lucas: Yeah, the weekly earnings number is only released quarterly. But it tells a similar story — about 3.9 percent annual growth, which is in the same ballpark as the hourly data. The consistency is reassuring. Luna: So to wrap up the core argument: after years of wages lagging behind prices, we may have entered a period where, energy aside, workers are finally gaining ground. Lucas: I think that's right, with one big caveat — it's not uniform. If you're in an industry tied to energy — transportation, manufacturing, agriculture — your costs are rising faster than your wage growth. But for most service-sector workers, whose biggest expenses are rent, healthcare, and food at home, the improvement is real. Luna: And the small-cap rally this week — the Russell up 3.1 percent — suggests investors are betting that domestic-oriented companies will benefit from that consumer strength. Lucas: Exactly. Small caps are more exposed to the US consumer, and if real wages are improving, that's good for earnings. So the market is essentially voting with its dollars that the core inflation story is more important than the headline. Luna: I just want to linger on one point — the bond market's breakeven inflation rate ticked up to 2.31 percent. That's still anchored below 2.5 percent, which suggests long-term inflation expectations aren't de-anchored. Lucas: Right. The ten-year breakeven is essentially the market's guess at average CPI over the next decade. At 2.31 percent, it's up a bit from last week's 2.29, but still well within the range of the last two years. So bond investors aren't panicking about the energy spike. Luna: Which brings us back to the worker. If I'm listening and my gas bill is up 40 percent, but my rent is only up 3 percent and my paycheck is up 4 percent, what's the bottom line? Lucas: The bottom line is that your purchasing power for most things is improving, but you're getting squeezed on energy. And unfortunately, energy is one of those purchases you can't easily avoid — you need to heat your home and fuel your car. So the pain is concentrated and visible, which is why it dominates the headlines. Luna: But the underlying trend is better than the headlines suggest. That's actually a hopeful take for an episode about wages and prices. Lucas: It is. And I think the data supports it. We're at an inflection point where wage growth has finally caught up to core inflation, and if energy stabilizes — which historically it does after geopolitical shocks — then the headline numbers will start to look a lot better too. Luna: For now, the numbers say your raise is beating core inflation. And that's not nothing. Lucas: It's actually a big deal. It's been years since we could say that confidently. So take the win — even if it comes with an asterisk for the pump.