Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Wage Growth Hasn't Turned Into a Wage-Price Spiral
Transcript
- Lucas: So the July CPI report landed about a week ago, and the headline number is still hovering around three percent. But the number I keep staring at is average hourly earnings — up to thirty-seven dollars and sixty cents, and on a year-over-year basis it's been grinding higher for months. Luna: That's the part that feels like a throwback to the seventies, right? Wages accelerating while the economy's barely growing at one and a half percent annualised. Lucas: Exactly. And the classic fear is the wage-price spiral: wages push prices, prices push wages, and the whole thing ratchets up. But look at the actual data — core CPI is basically flat, the ten-year breakeven is at two point two seven percent, and the Fed hasn't moved. So what's breaking that old chain? Luna: Is it just that productivity is doing the heavy lifting, or are workers actually falling behind? Lucas: That's the key question. If you strip out inflation, real average hourly earnings are actually down slightly from a year ago. The nominal number looks strong, but purchasing power is still getting squeezed. So the wage growth we're seeing is partly catch-up, not the start of a spiral. Luna: So workers are demanding more because they've been underwater, not because they expect prices to keep ripping. Lucas: Right. And there's a second force: inflation expectations themselves. The University of Michigan survey — short-term expectations have been volatile, but longer-term ones have stayed pretty anchored. That's the difference from the seventies. Back then, expectations were unmoored, and wages chased prices in a self-fulfilling loop. Luna: But with unemployment at four point one percent, isn't that still a tight labor market that should give workers more leverage? Lucas: It is tight, but it's loosening. Job openings have dropped from over seven and a half million in May to about seven point three six million in June. And initial jobless claims just ticked up to two hundred nine thousand. So the balance of power is shifting, just slowly. Luna: So the Fed can afford to wait and see, since the wage data isn't flashing red. Lucas: That's the read. And honestly, this is where I think the 'stagflation' label gets overused. We have slow growth and sticky inflation, sure. But the wage dynamic is behaving more like a slow adjustment than a spiral. It's not the seventies. Luna: But what about the sectors where wage growth is still really hot — healthcare, leisure, hospitality? Those are the ones feeding into services inflation. Lucas: Yeah, that's the nuance. In those labor-intensive industries, wage pass-through is real. But it's concentrated, not broad-based. And when you look at the overall picture, the share of compensation in GDP isn't surging. It's just recovering some lost ground. Luna: So if I'm a listener trying to make sense of my own paycheck, the takeaway is that a bigger nominal number doesn't automatically mean more buying power. Lucas: Exactly. And that's something we try to demystify on this show. We've been doing that for over a hundred and fifty episodes now, and we've never run an ad. That's a deliberate choice — we want this to be a resource that's free and clear of sponsor noise. If you find these conversations useful, and you want to keep them that way, you can support us at buy me a coffee dot com slash fexingo. It's a small gesture that keeps the lights on. Luna: Yeah, and it genuinely makes a difference. Every little bit helps us keep digging into these numbers. Lucas: Anyway, back to the wage puzzle. So we've got this slow-motion catch-up, anchored expectations, and a cooling labor market. But the other thing I've been watching is the gap between what workers are asking for and what companies are offering. There's data from the Atlanta Fed that tracks wage growth by job switchers versus stayers. Luna: Oh, that's a great one. Job switchers usually see bigger bumps, right? Lucas: Historically, yes. But in the last year, that premium has narrowed. Stayers are getting raises that are almost keeping pace with switchers. That suggests companies are trying to retain talent without fueling a bidding war. It's a sign that wage pressure is real but contained. Luna: And that's probably why we're not seeing the broad-based spiral. The wage increases are being distributed more evenly, not concentrated in hot spots. Lucas: Right. And there's a structural factor too — the labor force participation rate for prime-age workers has been creeping up. More people coming in means less desperation on both sides. Employers don't have to overbid, and workers don't have to accept real pay cuts. Luna: So the real risk isn't a seventies-style spiral, but something more mundane — stagflation that just lingers because wages and prices are both sticky. Lucas: That's the worry. And that's where the Fed's communication matters. They've been signaling that they're in no rush to cut rates, partly because inflation is still a bit above target. But if wage growth continues to moderate, they might find room to ease by early next year. Luna: But wouldn't cutting rates with inflation above target risk re-igniting expectations? Lucas: That's the tightrope. The Fed's framework now is more about 'symmetry' — they don't want to overreact to a temporary overshoot. But the market is pricing in a more cautious path. The ten-year breakeven at two point two seven is actually a vote of confidence that inflation will stay contained. Luna: So if the breakeven is stable, the bond market isn't buying a spiral either. Lucas: Exactly. And that's the most important signal. If the market started pricing in three or four percent inflation expectations, then we'd have a problem. But two point two seven is basically right where the Fed wants it. Luna: So we should be more worried about a wage-led demand slump than a wage-price spiral? Lucas: That's a sharp way to put it. If real wages keep falling, consumer spending — which is still the engine of this economy — could weaken further. And that would deepen the stagflation, because you'd get even slower growth without much progress on inflation. Luna: But we've seen some relief on goods prices, like that record plunge in lettuce prices. Does that help real wages in the short term? Lucas: It does, but it's noisy. Food and energy are volatile, and the Fed looks through them. The core measures — core CPI and core PCE — are more telling. Core PCE has actually ticked up a bit recently, so we're not out of the woods there. Luna: So the bottom line is that the wage data is telling a story of gradual healing, not a spiral. Lucas: I think so. But the caveat is that this could change quickly. If we get another supply shock — another geopolitical disruption or a spike in energy prices — then both wages and prices could start chasing each other again. Luna: And given the headlines about the Iran war, that's not a remote risk. Lucas: Right. So for now, the signal is cautiously optimistic. Wages are growing, but they're not out of control. Inflation is sticky, but expectations are anchored. It's a fragile equilibrium, but it's not the seventies. Luna: And that's worth paying attention to, because if the equilibrium breaks, we'll see it first in those job switcher numbers. Lucas: Or in the breakevens. That's the number I'll be watching next month. If it moves above two point five, we'll have a different conversation.