Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Wage Price Stalemate In October
Transcript
- Lucas: Look at the numbers coming out this morning. Average hourly earnings for private industry just ticked up to thirty seven dollars and eighty cents, but the core consumer price index is sitting at three hundred thirty eight point nine. That gap tells the whole story about why your paycheck feels heavier yet emptier. Luna: Right, because the raise is there, but the sticker shock is moving faster. It’s like running on a treadmill that keeps speeding up. Lucas: Exactly. We’ve talked a lot about the productivity wage gap and the hidden tax on insurance premiums in previous episodes, but today I want to drill into this specific mechanism: the service sector pricing power. When goods get cheaper or stable, services get expensive, and that’s where the real wage erosion is happening right now. Luna: So you’re saying the grocery bill isn’t the main problem anymore? It’s everything else? Lucas: It’s becoming the secondary problem. Let’s look at the employment cost index for wages, which hit one hundred seventy nine point zero in April and has been creeping up since. Employers are paying more, but they aren’t absorbing it. They’re passing it through to consumers via higher fees, tips, and service charges. The median usual weekly earnings are up to twelve hundred four dollars, but that doesn’t mean much if the cost of getting your car fixed or your hair cut jumps by five percent. Luna: That’s a huge shift from two years ago when food was the headline. Now it’s the invisible markup on convenience. Lucas: And it’s sticky. The ten-year breakeven inflation rate just moved up to two point three five percent yesterday. That means the bond market is pricing in persistent inflation expectations, not a quick return to target. If you’re a business owner, you’re looking at that number and thinking, 'I can raise prices again because people expect it.' And if you’re a worker, you’re negotiating for a three percent raise because that’s what everyone else is getting, even though costs are rising faster. Luna: But isn’t that supposed to cool off if the Fed actually raises rates? The survey says hikes are coming, just not this week. Lucas: Here’s the trap. Rate hikes slow down borrowing for big-ticket items like houses and cars, but they don’t directly lower the price of a haircut or a restaurant meal. Those prices are set by local competition and labor costs. Since jobless claims are near the lowest levels since the nineteen sixties, labor is still tight. Businesses have pricing power because they know they can find workers, so they keep raising prices to maintain margins against those higher wage bills. Luna: So the wage increase funds the price increase. It cancels itself out. Lucas: Precisely. It’s a closed loop. You see this in the PCE price index, which is at one hundred thirty one point six, with core PCE at one hundred thirty point five. The Fed prefers this measure, and it’s still elevated. But notice how the S&P five hundred is barely moving despite all this pressure. The market is pricing in a soft landing, but for the individual household, it feels like a hard slog. Luna: I feel like my rent is the biggest victim of this. If wages go up, landlords just raise rents immediately. Lucas: That’s the housing component of the CPI, which we touched on last week, but let’s connect it to the broader macro picture. The World Bank’s David Malpass noted recently that capital availability isn’t the issue; it’s the cost of borrowing. When capital gets expensive, construction slows, supply of new housing drops, and existing rents stay high. So even if you got a raise, you’re fighting against a structural shortage of housing supply driven by financing costs. Luna: It’s funny how the same factor—interest rates—hurts both the borrower and the landlord in different ways. Lucas: It creates a bifurcation in the economy. If you own assets, you might be fine because asset prices adjust slowly. But if you’re renting and relying on wage growth, you’re stuck in the middle. The UK inflation jumping to three point five percent this week shows this isn’t just a US problem. Global supply chains and labor markets are intertwined. What happens in London affects wages in New York. Luna: So it’s a global wage-price dynamic, not just local negotiations. Lucas: Absolutely. And that’s why the Federal Reserve is in such a bind. They can’t raise rates enough to crush service inflation without crashing the labor market, which currently has historically low jobless claims. They’re walking a tightrope. If they push too hard, unemployment spikes. If they don’t push hard enough, inflation stays entrenched in the service sector. Luna: And the voters feel it. That Trump approval rating hitting an all-time low on the economy makes sense if people feel squeezed despite having jobs. Lucas: It does. Because having a job isn’t enough if your purchasing power is declining. We need to take a quick pause here to talk about how we keep this show running, because the economics of podcasting are also feeling the squeeze. Luna: Yeah, it’s wild how even content creation costs are going up with server fees and editing software subscriptions. Lucas: If walking through the economy with us has made something click, and you want to help us keep these conversations ad-free and deep, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Support really does keep the lights on and lets us dig into these details without chasing clicks. Lucas: Back to the data. Let’s look at the retail sales side of this equation. When services get expensive, do people cut back on goods? Or do they just dip into savings? Luna: My gut says savings, because you can’t cancel your gym membership or your phone bill as easily as you can skip a vacation. Lucas: Exactly. Fixed costs are eating up the margin. The employment cost index includes benefits, which are rising too. Health insurance premiums, which we covered in episode two hundred nine, are part of that one hundred seventy nine point zero number. So employers aren’t just giving bigger cash bonuses; they’re paying more for healthcare, which means the actual take-home raise for workers is smaller than the headline wage number suggests. Luna: So the benefit inflation is hiding in plain sight within the wage stats. Lucas: It is. And that’s why looking at just hourly earnings is misleading. You have to look at total compensation. If your wages go up three percent but your health insurance deductibles go up five percent, you’re effectively losing ground. This is the silent wealth transfer happening right now. Luna: It feels like the system is designed to keep us just solvent enough to keep working, but not rich enough to escape the cycle. Lucas: That’s a cynical way to put it, but statistically, it holds water. The median household income hasn’t kept pace with the cumulative inflation of the last three years. Even with the recent uptick in wages, we’re playing catch-up on lost purchasing power, not gaining new wealth. Luna: So what’s the strategy for listeners? Do they try to lock in fixed costs? Lucas: Definitely. If you can refinance a mortgage or lock in a long-term insurance rate, do it. The alternative is floating with the tide, which means your expenses will always chase your income. The other move is skill acquisition. In a tight labor market, scarcity drives wages. If you’re in a service role that’s easy to replace, your wage growth hits a ceiling. If you’re in a specialized technical role, you have leverage. Luna: It’s basically betting on yourself because the macro environment won’t help you. Lucas: Precisely. The macro environment is neutral to negative for disposable income growth. You have to create your own alpha. That’s why career mobility is higher than ever. People are switching jobs more frequently to capture wage bumps, but that only works if you’re willing to leave your current role. Luna: Which sounds exhausting when you’re already working harder to pay the same bills. Lucas: It is exhausting. And that fatigue is visible in the JOLTS data and the quit rates. People are tired. But the data shows that those who do make strategic moves are still coming out ahead. The question is whether the next quarter brings relief or more of the same stalemate. Luna: With the Fed signaling hikes are coming, I doubt we’ll see relief anytime soon. Prices will just adjust upward again. Lucas: Likely. Unless we see a sharp correction in the labor market, which seems unlikely given those historic low jobless claims. We’re probably in for another quarter of modest wage growth meeting modest price growth, resulting in flat real incomes. Luna: Flat real incomes. That’s the definition of the stagnant middle. Lucas: It is. And until productivity actually takes off in the service sector—which it hasn’t really done yet—we’re stuck in this loop. Technology helps manufacturing, but it’s harder to automate a nurse or a teacher, and those wages keep rising due to demand. Luna: So maybe the solution isn’t lower prices, but higher productivity in services. Lucas: That’s the holy grail. If AI can boost service sector productivity, then wages can rise without prices rising. But we’re not there yet. Right now, it’s just a tug of war. And most people are losing grip. Luna: A tough place to be, but at least we’re tracking the exact mechanics of why. Lucas: Always. Knowing the game is half the battle. Next week, we’ll look at how small businesses are navigating this exact squeeze, because they’re the ones setting those service prices. Luna: Sounds like a critical piece of the puzzle. Thanks for breaking it down, Lucas. Lucas: Anytime. Keep watching those breakeven rates. They tell you where the wind is blowing before the sails even move.