Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Inflation Gap Between Your Paycheck and CPI
Transcript
- Lucas: So CPI came in at 334.0 for May—up about half a percent from April. Core CPI, stripping out food and energy, hit 336.1. On paper, that's a deceleration from the spikes we saw in 2022 and 2023. But here's the thing that's bugging me: the headline number doesn't match what a lot of people tell me about their own finances. Luna: You mean the gap between the official inflation rate and the feeling that your paycheck doesn't stretch as far? Because I hear that constantly. Lucas: Exactly. And today I want to drill into one specific reason for that gap: the disconnect between CPI and what's happening to your actual earnings. Not just nominal wages, but real purchasing power—and how the labor market is shifting under our feet. We got a fresh data point this morning: the June jobs report showed only 57,000 new payrolls, and the unemployment rate ticked up to 4.2 percent. Luna: That's a pretty soft number. And I saw the labor force participation rate fell to its lowest in fifty years, outside of COVID. That's huge. Lucas: It is. And it ties directly to why CPI feels like it's underestimating the squeeze. Because if fewer people are working or looking for work, that puts upward pressure on wages for those who are employed—but it also means more households are living on fewer paychecks. Let me walk through the math. Luna: Please, because I think a lot of our listeners are asking: if inflation is cooling, why is my rent still going up faster than my raise? Lucas: Right. So CPI's composition is roughly one-third housing, and within that, owners' equivalent rent—what homeowners would pay to rent their own home—is a huge component. That metric tends to lag actual market rents by months or even years. So when real-time rents are rising 8 percent year over year, the CPI rent component might only be reflecting a 5 percent increase. Luna: And meanwhile your landlord isn't waiting for the official data to update your lease. Lucas: Exactly. So if your rent goes up 8 percent and your salary increase was 4 percent, you're losing ground. The Fed's preferred inflation gauge, core PCE, hit 3.4 percent in the latest reading—still above the 2 percent target. But for a renter in a major city, their personal inflation rate could be double that. And that's the gap that official numbers miss. Luna: It's also about what you're spending on. CPI weights things like new cars and electronics, which have actually gotten cheaper. But services—rent, insurance, education, healthcare—those are still climbing faster than the overall index. Lucas: And those services are the ones you can't easily substitute. You can't decide to not pay rent this month and buy an iPhone instead. So the inflation that hits hardest is the inflation in non-discretionary services. And that's where wage growth has to keep up, or else you feel poorer. Luna: Let's talk about the labor market side. The participation rate dropping means fewer people are counted as unemployed because they've stopped looking. That can actually make the unemployment rate look artificially low—or at least less scary. But it means the economy has a hidden slack. Lucas: Exactly. The headline unemployment rate is 4.2 percent, which historically is still low. But the prime-age participation rate—people aged 25 to 54—has fallen. That's a concern because those are typically the highest-earning years. If they're dropping out, it suggests structural issues: maybe they can't find jobs that pay enough to justify the commute or childcare costs. Luna: And that's where the wage story gets complicated. Nominal wages are still rising—average hourly earnings are up something like 4 percent year over year. But real wages, adjusted for CPI, might only be up 1 percent or even flat. And if your personal inflation is higher than CPI, you're effectively taking a pay cut. Lucas: Bingo. So the official story is that the labor market is cooling but still solid. The Fed held rates at 3.63 percent—the effective federal funds rate is exactly that—and they're watching inflation data closely. But the data they watch, like core PCE, doesn't capture the renter's experience. So they might see progress and start cutting rates later this year, while households still feel the pinch. Luna: There's also a behavioral angle. Companies are hesitant to cut nominal wages—that's the classic 'wage stickiness'—but they can cut hours or reduce bonuses. So your take-home pay might not grow as fast as your hourly rate suggests. Lucas: Right. And prices are sticky too, but in the other direction. Once a landlord raises rent, it rarely comes down. Same for insurance premiums. So the cost structure of a household ratchets up, while income growth is more flexible—it can slow or even reverse if you lose hours. Luna: That's the asymmetry that makes this feel so frustrating. The official numbers say things are getting better, but your personal ledger says otherwise. Lucas: Look, if walking through the economy with us has made something click, and you've gotten value out of this conversation, the best way to keep this show independent and ad-free is listener support. If today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. No pressure, no guilt—just if it felt worth it. Luna: Yeah, and it genuinely helps us keep digging into these gaps between data and daily life. So appreciate anyone who throws in. Lucas: Alright, back to the gap. One more layer: the composition of CPI is updated every two years based on consumer expenditure surveys. But that survey might not capture the spending patterns of a low-income renter versus a high-income homeowner. So the 'average' consumer CPI tracks is an abstraction. Luna: And if you're in a city where rents have surged, your personal inflation basket is heavier on housing. The official CPI might show overall inflation at 2.7 percent core, but for you it's 5 or 6 percent. Lucas: That's the core of the disconnect. So when the Fed looks at the 10-year breakeven inflation rate—which is about 2.23 percent, down slightly—they see inflation expectations anchored. But that's a market-based measure, not a household one. It reflects what bond traders think, not what renters feel. Luna: So what's the takeaway for someone listening? How do they square the official numbers with their own experience? Lucas: I'd say two things. One: track your own personal inflation rate. Look at your biggest expenses—rent, transportation, food—and see how much they've changed over the past year. Compare that to your income growth. That's your real story. Two: understand that when the Fed says they're making progress on inflation, they're looking at a different basket than yours. Progress might be real, but it doesn't mean your rent is going down. Luna: And maybe that explains why consumer sentiment remains low even as GDP grows. People are voting with their wallets—they feel poorer even if the aggregates look okay. Lucas: Absolutely. And that's the kind of nuance that gets lost in the headline numbers. So our job here is to keep pulling back the curtain. Next episode, I want to look at a specific service category that's been surging and why CPI might be undercounting it. Luna: Sounds good. I'll start digging into the data.