Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Service Wage Trap in 2026
Transcript
- Lucas: If you look at the headline number for average hourly earnings right now, it’s sitting at thirty seven dollars and eighty cents as of August first. On paper, that’s an increase. It looks like progress. But if you walk into a grocery store or try to book a dentist appointment this week, it doesn’t feel like progress at all. Luna: Right. The numbers go up, but the stuff we actually buy keeps getting pricier. It’s that weird disconnect where your paycheck grows but your wallet shrinks. Lucas: Exactly. And the reason it feels so disconnected is because we’re seeing a massive split in the economy. Goods inflation has basically flattened out. You can buy a TV or a pair of jeans without paying a premium compared to last year. But services? That’s where the heat is still on. Luna: So we’re not paying more for products, we’re paying more for labor. Healthcare, childcare, haircuts, repairs. Lucas: Precisely. The core CPI excluding food and energy came in at three hundred thirty six point eight for July. That’s barely moving down from earlier in the year. The Federal Reserve has been staring at this number for two years, trying to get it back to two percent, and it’s stubbornly stuck above three percent in the services bucket. Luna: But if wages are rising at nearly four percent, shouldn’t that balance it out? Workers should be winning here. Lucas: That’s the trap. Wages are rising, yes. But they’re not rising fast enough to cover the specific categories that make up the bulk of household budgets for the middle class. Let’s look at the Employment Cost Index for wages. It hit one hundred seventy nine in the second quarter. That tells us employers are spending more to hire people. Luna: Okay, so businesses are paying more for staff. Why doesn’t that money end up in our pockets? Lucas: It does, but with a lag. And there’s a productivity problem. When a business pays its nurses or its teachers or its warehouse managers more, they have to pass that cost on to consumers unless their output increases. Productivity growth in the US has been sluggish. We aren’t making more widgets per hour to offset those higher wage bills. Luna: So it’s a cycle. Higher wages lead to higher service prices, which erode the value of those same wages. Lucas: That’s the wage-price spiral we’ve been warned about since the seventies. But it’s happening quietly. It’s not gas prices spiking overnight. It’s your insurance premium going up five percent while your raise was only three percent. Luna: It feels like the goalposts keep moving. You finally catch up on rent, and then tuition jumps. Lucas: Before we dig deeper into who gets squeezed, I want to mention something real quick. If walking through the economy with us has made something click, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these shows. No ads, just us talking about the money stuff. Luna: Yeah, it helps keep the lights on and the research accurate. Appreciate anyone who checks it out. Lucas: Back to the data. The median usual weekly earnings were one thousand two hundred four dollars in January. That sounds solid until you realize housing costs are absorbing the majority of that gain. In cities like New York or San Francisco, the service component of inflation is pushing well past four percent. Luna: Four percent? That’s huge. So even if you got a standard three percent raise, you’re effectively losing ground. Lucas: You are. And this is where the distribution matters. High-income earners with stock options or asset growth are fine. Their net worth goes up with the market. But for someone relying solely on salary, especially in the service sector, real wages are stagnant or declining. Luna: What about the PCE price index? That’s what the Fed really cares about. Where is that sitting? Lucas: The personal consumption expenditures price index is at one hundred thirty one point seven. Core PCE, which strips out volatility, is at one hundred thirty zero point seven. The Fed’s target is two percent. We are currently running closer to two point five or two point six percent depending on the month. It’s close, but it’s not there. Luna: And with wholesale prices rising point four percent in August, the pressure isn’t gone. Suppliers are passing costs up the chain. Lucas: Correct. Wholesale prices rose point four percent in August, exactly as expected. That signals that the upstream costs haven’t collapsed. If raw materials and transport stay expensive, final consumer prices won’t drop either. Luna: So the Fed is in a tough spot. They need to cool inflation, but cooling it might crash the job market. Lucas: They’re trying to engineer a soft landing, but the risk is a hard landing. With the ten-year breakeven inflation rate at two point forty percent, the markets are still pricing in persistent inflation. Investors aren’t convinced the Fed has won yet. Luna: Two point forty percent breakevens means they think inflation will run hot. That affects bond yields. Lucas: It drives up borrowing costs. Mortgages, car loans, credit cards. All of that becomes more expensive. Which reduces demand. Which lower prices. But if wages are sticky, businesses just cut hours instead of cutting prices. Luna: That sounds like the worst of both worlds. Lower hours, same prices. Lucas: Exactly. And that’s why the retail sales figures are so watched. If people stop buying services because they can’t afford them, the whole model breaks. But right now, consumers are still spending. They’re using savings and credit cards to bridge the gap. Luna: How long can that last? Savings rates have been drawn down for years. Lucas: Not forever. We’re seeing early signs of stress in the consumer credit reports. Delinquencies are ticking up slightly for auto loans and credit cards. The buffer is thinner than it was two years ago. Luna: So the wage gains are being consumed by debt service too? Lucas: Partially. But mostly it’s housing and healthcare. Those are non-negotiable expenses. If your rent goes up five percent and your health insurance deductible goes up ten percent, no amount of retail therapy offsets that. Luna: It feels like the structure of the economy has shifted against the average worker. Lucas: It has. The shift from goods to services has accelerated. Services are labor-intensive. You can’t automate a nurse or a plumber as easily as you can automate a factory line. So when labor gets expensive, services get expensive. Luna: Which means inflation is structural, not just cyclical. It’s baked into the way we deliver care and education. Lucas: That’s a key insight. Cyclical inflation can be fixed by raising interest rates. Structural inflation requires productivity breakthroughs or policy changes. We don’t seem to have either on the horizon. Luna: So what do workers do? There’s not much leverage in most service jobs. Lucas: Unionization attempts are picking up steam again. Amazon, Starbucks, Hollywood writers. They’re realizing that collective bargaining is the only way to force wages to rise faster than the local cost of living. Luna: But unions are still a small part of the private sector. Most people don’t have that option. Lucas: True. For the majority, it’s about skill acquisition. Moving into sectors with higher labor productivity. Tech, specialized trades, healthcare administration. Jobs where the output per hour is high enough to justify high wages without breaking the business model. Luna: Or just working multiple jobs. The gig economy is a big part of that now. Lucas: It is. But gig work lacks benefits. So you’re earning more cash, but your effective compensation—healthcare, retirement—is lower. It’s a false economy. Luna: It sounds exhausting. Just trying to keep up with the baseline. Lucas: It is. And that’s why the political pressure is mounting. People are angry not because they’re poor, but because they’re working harder and feeling poorer. The social contract is fraying. Luna: Do you think the Fed realizes this political risk? Lucas: They have to. If the economy stalls too hard, the next election brings in leadership that wants to print money or control prices directly. The Fed prefers stability over chaos. They’re walking a tightrope. Luna: One wrong step and they lose control. Lucas: Or they step too lightly and inflation reignites. With the trade tensions mentioned in the headlines, supply chains could get disrupted again. Tariffs on Canadian goods or other trade barriers would instantly spike import prices. Luna: So external shocks could derail all this careful balancing act. Lucas: Absolutely. Geopolitics doesn’t care about FOMC meetings. A shipping lane closure or a new tariff can wipe out months of wage gains in a single week. Luna: It makes planning impossible. How do you budget for a future that changes based on news headlines? Lucas: You don’t. You focus on liquidity and skills. Keep some cash on hand for emergencies, and invest in yourself so you can pivot when the market shifts. That’s the only advice that holds water right now. Luna: Practical, if not comforting. Thanks for grounding us in the reality of it, Lucas. Lucas: Anytime. It’s messy, but it’s the world we’re living in. Let’s see where those service prices go next month.