Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Consumer Sentiment Hit a Record Low Despite a Strong Labor Market
Transcript
- Lucas: So consumer sentiment just hit an all-time low. The University of Michigan survey for May 2026 — fresh record low. And this is happening while the S&P 500 is above 7,400 and the Dow just crossed 50,500. The labor market is still adding jobs, average hourly earnings ticked up to $37.40 in April. Luna: Right, it's this huge disconnect. People are telling pollsters they feel terrible, but by almost every hard metric, the economy is doing fine. What's going on? Lucas: Well, the headline that everyone saw — and we have to mention it — is the Iran war. That's fueling energy price worries, and when people fill up their tanks or see heating bills, they feel it directly. But there's something deeper: the gap between the inflation statistics and what consumers actually experience. Luna: You mean CPI versus their personal inflation rate? Lucas: Exactly. The CPI for April came in at 332.4, up from 330.3 in March — that's about 2.4% annualized. Core CPI, excluding food and energy, is similar. But the stuff that people buy every week — groceries, rent, gas — those categories have been running hotter than the average. The CPI weights shelter at about a third, but for a renter in a city, rent might be half their spending. Luna: So their personal inflation rate could be 4 or 5 percent even if the official number says 2.4. Lucas: Right. And meanwhile, wages are growing — the Employment Cost Index for wages hit 177.5 in the first quarter, up from 176.2. That's about a 3% annualized gain. So on paper, wages are outpacing inflation. But in practice, if your rent went up 6% and your grocery bill went up 5%, that 3% raise doesn't cover it. Luna: And the sentiment survey is asking people about their personal finances, not the macroeconomy. So that's why we get this record low even as GDP is growing. Lucas: There's also the geopolitical factor. The Iran war headlines are relentless — Putin and Xi just revived a gas pipeline deal, and that's rattling energy markets. The 10-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, ticked up to 2.40% from 2.39%. That's still anchored, but it's creeping higher. Luna: And the Fed watches that number closely. If breakevens start to climb above 2.5%, they might pause rate cuts or even signal a hold. Lucas: Exactly. The Fed's preferred inflation gauge is the core PCE price index — that was 129.3 in March, up from 128.9. Still above their 2% target, but not accelerating. So the central bank is in a tough spot: the economy is strong, but consumers are miserable. Do they cut rates to boost sentiment, or hold steady to fight inflation? Luna: One thing that stands out to me: median usual weekly earnings were $1,204 in 2025, up from $1,159. That's about a 4% increase. But if you're a low-wage worker, your rent and food costs have eaten that whole raise. Lucas: And that's the real story behind the sentiment number. The people responding to the survey are disproportionately renters, younger workers, and those who haven't seen big stock market gains. The S&P 500 at 7,473 doesn't help them if they don't own stocks. Luna: So this record low is a warning. It's not just about Iran or inflation — it's about the distribution of gains. Lucas: And that's why this matters for the economy going forward. Consumer spending is two-thirds of GDP. If sentiment stays this low, people might pull back — not because they're out of a job, but because they feel squeezed. That's what could tip us into a slowdown. Luna: Yeah, it's almost a self-fulfilling prophecy. If everyone thinks it's bad, they spend less, and then it becomes bad. Lucas: Exactly. So the question is: does the Fed step in? Or do we need wage growth to accelerate further to close the gap? The Employment Cost Index shows wages rising, but it's a lagging indicator. Luna: And the other thing is productivity. If companies can't pass on higher wages through higher prices, they'll squeeze margins or cut jobs. That's the risk. Lucas: Right. And we saw that in the April jobs report — average hourly earnings only ticked up a penny from $37.35 to $37.40. That's not accelerating. So the wage growth story is real but modest. Luna: So the disconnect is actually about expectations. People expected inflation to come down faster, and it hasn't. They expected real wages to recover, and they haven't fully. Lucas: And the sentiment survey captures that frustration. The question is whether it's just noise or a leading indicator of a consumer pullback. Luna: If today's episode was useful to you, the way we keep this ad-free is through listener support. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep these conversations going without any sponsors or interruptions. So if you found value in understanding the sentiment gap, that's where you can chip in. Luna: Alright, back to the data. Lucas, you mentioned the Russell 2000 was up 3.4% in the last five days. That's small-cap stocks — is that a sign that optimism is broadening? Lucas: It could be. Small caps are more domestically focused and more sensitive to interest rates. If the market thinks the Fed is done hiking and maybe cuts later this year, that's a tailwind for them. But it also suggests that the rally isn't just in mega-cap tech anymore. Luna: So the stock market and consumer sentiment are sending opposite signals. Which one should we trust? Lucas: Historically, consumer sentiment is a contrarian indicator. When it's really low, the economy often surprises to the upside. But this time feels different because of the geopolitical overlay. The Iran situation isn't going away, and energy prices are sticky. Luna: And the breakeven inflation rate at 2.40% suggests the market expects inflation to stay above target for a while. Lucas: Right. So the bottom line for me is: the labor market is genuinely strong, wages are growing, but the cost of living is growing faster for the people who are most sensitive to it. That's the recipe for low sentiment. And until that gap closes, the record low might not be a one-off — it could be the new normal. Luna: That's a sobering thought. Let's hope the data improves, but for now, the numbers tell a story of two economies. Lucas: Exactly. One for investors, one for consumers. And the challenge is to bridge them.