Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Getting Eaten by Energy Prices
Transcript
- Lucas: So we just got the May CPI print yesterday — consumer prices rose 4.2 percent year over year. That's the highest in three years. And I think a lot of people hear that number and immediately think, 'There goes my raise.' Luna: Right, because we've been talking for weeks about how wage growth is finally outpacing inflation. But this CPI number feels like a gut punch. Lucas: It does. And the interesting thing is, the headline number is being driven by one category more than any other: energy. And not just gas prices — though those are up too — but also electricity and natural gas. Energy was up something like 8 percent year over year in May. Luna: Eight percent. That is not trivial. And it hits everyone, but especially people with longer commutes or lower incomes. Lucas: Exactly. And here's the thing — if you strip out food and energy, core CPI was up 3.9 percent. Still high, but not 4.2. So the gap between headline and core is basically the energy story. And that matters because when people say 'my paycheck isn't going as far,' energy is often the first place they feel it. Luna: It's also one of the hardest categories to substitute away from. You can't really decide not to heat your home in the winter, or not to drive to work. Lucas: Right. And there's a really interesting data point from the New York Fed's survey of consumer expectations that came out this week. Household worries about finances hit the highest level since July 2022. So even though wage growth has been solid — average hourly earnings up to thirty-seven fifty an hour in May — people are still feeling squeezed. And I think energy is a big reason why. Luna: Because the raise you got maybe covered the 3.9 percent core inflation, but if you spend a disproportionate share of your income on energy, your personal inflation rate is much higher. Lucas: Exactly. The Bureau of Labor Statistics publishes these experimental 'consumer expenditure weighted' inflation rates. And for the lowest quintile of earners, their effective inflation rate is often higher than the headline because they spend a larger share on energy and housing. So a 4.2 percent headline CPI might feel like 5 or 6 percent to a lot of households. Luna: And that's what the New York Fed survey is picking up. It's not just a number — it's a feeling of, 'I got a three percent raise, but everything still costs more.' Lucas: Yeah. And the other piece here is the breakeven inflation rate. The ten-year breakeven ticked up to 2.34 percent as of yesterday. That's the market's expectation for average inflation over the next decade. So the market is essentially saying, 'We don't think this energy spike is just a blip.' Luna: Which also influences the Fed. But the Fed looks at PCE, not CPI. And core PCE was up 2.9 percent in April. Lucas: Right, PCE runs cooler than CPI because it weights things differently and accounts for substitution. But here's the thing: PCE includes energy too. And if energy prices keep rising, core PCE is going to start creeping up. The ECB is dealing with the same dynamic — they're about to decide on rates with energy front and center. Luna: So what does this mean for the average worker? If their raise is three or four percent, but energy is eating up an extra one or two percent of that, they're essentially treading water. Lucas: Right. And that's the story we're tracking. Wage growth is positive in real terms if you look at the overall averages. But the distribution matters. If you're in a sector that didn't get a big raise — like retail or hospitality — and you're facing higher energy costs, your real wage is actually falling. Luna: There's also the psychological aspect. Energy prices are very visible. You see the price at the pump every week. You see your utility bill. That constant reminder makes people feel poorer, even if their bank account is technically growing. Lucas: Totally. And that feeds into consumer sentiment, which then affects spending, which then affects the broader economy. So it's not just a personal finance issue — it's a macro issue. Luna: I want to come back to the breakeven rate for a second. 2.34 percent — that's still within the Fed's comfort zone, right? Their target is 2 percent. Lucas: It's above target, but not dramatically. And remember, breakevens include a risk premium. So part of that 2.34 is compensation for uncertainty about future inflation. But the fact that it's rising suggests the market is pricing in a higher probability of persistent inflation. And if the ECB cuts rates this week while the Fed holds, the dollar could weaken, which would push import prices higher — including energy. Luna: So there's a real chance this energy-driven inflation sticks around for a while. Lucas: Yeah. And the Fed's preferred measure — core PCE — might not capture the full pain because it excludes food and energy. But the Fed knows that energy feeds into core over time through transportation costs and production costs. So they're watching it closely. Luna: Let's talk about solutions for a minute. Is there anything workers can do to protect their purchasing power from energy shocks? Lucas: At an individual level, it's tough. You can try to reduce energy consumption — carpool, insulate your home, adjust your thermostat. But those are marginal. At a policy level, some have proposed energy rebates or adjusting the CPI for energy more transparently. But that's not happening anytime soon. Luna: So the takeaway is: your raise might look good on paper, but if you're spending a bigger chunk of it on energy, you're not actually better off. Lucas: Exactly. And that's the story we're going to keep tracking. The May jobs report comes out Friday, and we'll get more wage data. But for now, energy is the wild card. Luna: And speaking of tracking — if you're finding these conversations helpful in understanding where your money actually goes, we do want to mention that this show is entirely listener-supported. No ads, no sponsors. If you've gotten something out of it, you can help keep it going at buymeacoffee.com/fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just a way to support the work if it's made a difference for you. Lucas: Yeah, we really appreciate everyone who does. And it helps us keep digging into these angles that matter. So, back to energy — one more thing I want to flag: the small-cap index, the Russell 2000, is down 2.3 percent over the past five days. That's partly because small companies are more exposed to energy costs and higher interest rates. So the energy story is hitting businesses too, not just households. Luna: That's a good point. Small businesses often can't pass on higher energy costs as easily as big corporations. Lucas: Right. So the ripple effects are broad. We'll be watching the jobs report on Friday to see if hiring slows in energy-intensive sectors. And of course, next month's CPI will tell us whether May was a peak or a trend. Luna: Something to keep an eye on for sure. Thanks, Lucas. Lucas: Thanks, Luna. Talk soon.