Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Paycheck Feels Lighter Than It Should
Transcript
- Lucas: If you look at the headline number for average hourly earnings in private industries right now, it sits at thirty-seven dollars and eighty cents. That is a nice uptick from last month, and if you just stare at that single digit, it looks like a victory lap for workers. Luna: But when I go to the grocery store this week, the total at the register hasn't moved much since June, so I am not sure that victory feels real yet. Lucas: Exactly. And that is the precise friction point we are digging into today. The nominal wage is climbing, yes, but the denominator—the price of what you actually buy—is being propped up by something structural rather than cyclical. We have seen this before with energy shocks, but the New York Fed flagged earlier this week that much of the recent inflation on everyday items is now directly attributable to tariffs. Luna: So we are essentially paying a tax on consumption while trying to catch up on wages? That sounds like running on a treadmill that keeps getting steeper. Lucas: It is exactly that metaphor. Let us pull the Employment Cost Index out of the drawer. For the second quarter, wages were up to one hundred seventy-nine. That is solid, healthy growth, especially compared to the sluggish pace of twenty-two or twenty-three. But pair that against the Core PCE Price Index, which ticked up to one hundred thirty point five in August, and you see the squeeze. Luna: The Core PCE is still creeping up, so even with higher pay, the margin for saving isn't expanding the way people hoped after the pandemic rush. Lucas: Right. And here is the kicker that makes this episode different from the ones we did in September. Usually, when wages lag prices, it is because demand is too hot and companies are bidding labor away. This time, the price side is being pushed up by policy—specifically trade policy—and the wage side is just barely keeping pace with basic maintenance. It is not a boom; it is a drag. Luna: I remember reading that IMF chief Georgieva mentioned AI as both hope and hazard recently. Does that tech angle help with this specific wage-price disconnect? Lucas: It should, theoretically. If productivity jumps because of AI integration, unit costs should fall, and those savings should flow to wages or lower prices. But we are seeing a lag. The productivity payoff, which we talked about in Episode Two Hundred Eight, is not showing up in the consumer basket yet. Instead, we are seeing the tariff hit first. Luna: So the efficiency gains are getting eaten by the new import taxes before they ever reach my bank account. Lucas: Precisely. And look at the breakeven inflation rate on the ten-year Treasury. It dropped slightly to two point three five percent yesterday. Markets are whispering that they think this will cool off eventually, but the survey data from the Fed shows fear is rising. One-year inflation expectations hit their highest level since May of twenty-twenty-three. Luna: That is a long time ago to be looking back at, and it suggests consumers are bracing for a sustained hit rather than a temporary spike. Lucas: It does. And that behavioral shift matters more than the raw data points. When people expect prices to stay high, they change their spending habits. They delay big purchases. They trade down. That slows economic momentum, which eventually hurts the very wage growth we are celebrating in these numbers. Luna: It feels like a self-fulfilling prophecy where the fear of inflation becomes the cause of the next slowdown. Lucas: Let me pause us there for a second. If walking through the economy with us has made something click, or if you just appreciate the deep dive into these numbers without the usual noise, I want to ask for your support. We keep this network ad-free because we believe the analysis should stand on its own merit. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It helps us keep the research sharp and the ads out. Luna: Yeah, and honestly, knowing that listener support keeps the lights on makes those little insights about the CPI feel a lot more valuable. Lucas: Thanks for that. Now, let us get back to the meat of it. Because the tariff impact is concentrated on tradable goods, we are seeing a divergence between what you buy at the store and what services cost. Services, which make up a huge chunk of the economy, are still sticky. But the goods sector is where the tariff shock is landing hardest right now. Luna: So if I am buying clothes or electronics, I am feeling the pinch immediately, but my rent or my haircut might not reflect that same pressure yet. Lucas: Spot on. And that creates a weird psychological effect. You feel poor because your discretionary spending power is shrinking, even though your income is technically growing. It is the difference between earning more and having more freedom. The latter is what matters for quality of life. Luna: Freedom is a good word for it. Because if I have to spend ten percent more on the same groceries, I literally have less choice in how I use the rest of my paycheck. Lucas: And that constraint ripples outward. When you cut back on non-essentials to cover the tariff-inflated essentials, you hurt local businesses. You hurt small retailers who don't have the supply chain leverage to absorb those costs. So the macro policy decision made in Washington ends up affecting the corner store owner in Ohio. Luna: It really connects the federal trade policy to the local main street economy in a way that wasn't obvious a year ago. Lucas: It is a direct line. And consider the median usual weekly earnings. They are sitting at twelve hundred and four dollars. That sounds decent until you realize that housing costs, which are part of that CPI basket, have been rising faster than wages for most households. The gap between income and essential expenses is widening. Luna: So even if I get a raise, if my rent goes up by a larger percentage, I am effectively taking a pay cut in terms of disposable income. Lucas: That is the reality for a lot of families. And it explains why the happiness gap we discussed in Episode Two Hundred Three is still there. People are working harder, maybe earning more on paper, but they feel less secure. Security comes from the buffer, and that buffer is thinning. Luna: It is frustrating because the narrative is always 'look how strong the job market is,' but the feeling on the ground is 'why is everything so expensive?' Lucas: Because the narrative focuses on the input—labor—and ignores the output—prices. They are two sides of the same coin, but they move at different speeds. Right now, prices are moving faster due to those external shocks we talked about. Luna: Do you think the Federal Reserve can do anything about this specific type of inflation, or is it purely a fiscal issue? Lucas: This is the classic dilemma for central bankers. Tariffs are supply-side constraints. Raising interest rates doesn't make imported goods cheaper. In fact, it might strengthen the dollar enough to offset some of the tariff hit, but it also crushes domestic demand. It is a terrible tool for this specific problem. The Fed is largely watching and waiting. Luna: So they are stuck in the middle, unable to fix the root cause without risking a recession. Lucas: Exactly. Which puts the pressure on Congress and the administration. But given the political gridlock we usually see, change is slow. Meanwhile, we are stuck in this period of adjustment. Workers are negotiating harder for raises, which feeds back into the Employment Cost Index, creating a wage-price spiral that is low-grade but persistent. Luna: Low-grade but persistent is the worst kind of economic enemy. It wears you down over time. Lucas: It does. And if you look at the S&P 500, it is hovering around seven thousand seven hundred sixty-five. Markets are pricing in resilience, but individual investors are feeling the pinch. There is a decoupling between the stock market and the consumer experience that is becoming harder to ignore. Luna: I notice that too. My portfolio might be green, but my monthly budget is red. It is a strange duality to live with. Lucas: It is. And that brings us back to the core question: what is the future path here? If tariffs remain in place, we likely see this dragged-out inflation. If they are rolled back, prices could stabilize quickly, giving workers a real boost in purchasing power. But that is a gamble. Luna: A gamble that everyday people are footing the bill for while politicians debate the theory. Lucas: Pretty much. So, for anyone listening who is trying to navigate this, the advice isn't to panic, but to be aware. Lock in fixed costs where you can, avoid variable debt, and understand that your salary negotiation needs to account for that extra ten percent in hidden costs. Luna: Practical advice for a very abstract problem. I like that approach. Lucas: We will see how this plays out in the next quarter. The data will tell us if the tariffs bite deeper or if the productivity gains finally start to show. Until then, we keep watching the numbers closely. Luna: And we keep talking about it, because understanding the mechanics is the best defense against the anxiety. Lucas: Agreed. Thanks for tuning in to Wages and Prices. We will catch you next time with another deep dive.