Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Finally Beating the Cost of a Vacation
Transcript
- Lucas: Let's talk about the one thing that still feels like it should be getting more expensive but isn't: taking a vacation. Luna: Because we just got the June jobs report—57,000 new payrolls, unemployment at 4.2%—and the big story was that wages keep ticking up. Lucas: Right. Average hourly earnings for private workers hit $37.60 in June. That's up from $37.51 in May. Not a huge jump month to month, but the trend is clear: wages are grinding higher. Luna: Meanwhile, if you've booked a flight or a hotel lately, you've probably noticed prices are… flat. Even a little down. Lucas: Exactly. The Bureau of Labor Statistics data shows airfare prices in May were essentially unchanged year over year. And hotel rates, once you adjust for inflation, have actually fallen about 2% from their peak in 2023. Luna: So the gap is widening. Your raise is finally outpacing the cost of a getaway. Lucas: And the question is: why now? Why isn't the vacation industry pricing like everything else? Luna: I've got a theory. It starts with air travel. Lucas: Lay it on me. Luna: Airlines added a ton of capacity in 2024 and 2025—new planes, new routes—especially on domestic leisure routes. They overcorrected for the pandemic rebound. Lucas: And now demand is normalizing. So they can't just jack up fares the way they did in 2022. Luna: Right. Plus, the big discount carriers—Spirit, Frontier—have been aggressively matching mainline prices. That keeps a lid on things. Lucas: And on the hotel side? Same dynamic? Too much supply? Luna: Sort of. It's not just hotels—it's Airbnb and Vrbo. There's been an explosion of short-term rental listings, especially in smaller markets. That's competing directly with traditional hotels and dragging down average daily rates. Lucas: So the vacation basket—flights, hotels, maybe a rental car—is actually getting cheaper in real terms, even as your paycheck grows. Luna: Exactly. The consumer price index for May shows overall inflation at about 2.4% annualized. But the 'lodging away from home' sub-index? Up just 1.8%. And airfares are down 0.6% year over year. Lucas: That's a meaningful divergence. For reference, core CPI—excluding food and energy—is running at 2.6%. So travel is growing slower than the general price level. Luna: And wages are growing faster than both. Average hourly earnings are up about 3.7% year over year. That's nearly a full percentage point above core inflation. Lucas: So for the first time in a while, the worker who gets a 4% raise can actually afford a nicer vacation this year than last year—without cutting back elsewhere. Luna: Which is pretty wild when you remember that two years ago, people were paying $400 for a round-trip to Orlando and thinking, 'this is the new normal.' Lucas: The new normal turned out to be more cyclical than structural. But let's dig into the mechanics of why wages are finally winning here. Luna: Because the labor market is still tight enough to push pay up, but not so tight that it's sending inflation spiraling. Lucas: That's the sweet spot. And the July 2 jobs report—the one with the 57,000 payrolls—actually tells us something interesting. Luna: A lot of people saw that number and worried the economy was stalling. But wages kept climbing. Lucas: Right. Because what's happening is a compositional shift. The sectors that are adding jobs—healthcare, leisure, government—tend to have lower average wages. But the sectors that are retaining workers—tech, finance, professional services—are competing for talent and offering bigger raises. Luna: So the average goes up even as the headline payroll number is mediocre. Lucas: Exactly. And another factor: the labor force participation rate dropped to its lowest in 50 years outside of the pandemic. That's a headline from yesterday. Fewer people looking for work means employers have to pay more to hold onto the workers they have. Luna: So basically, the vacation industry is caught between two forces: supply-side competition holding prices down, and a labor market that's finally tilting in workers' favor. Lucas: That's the story. And it's not just about flights and hotels. Think about all the ancillary costs of a vacation—dining out, entertainment, car rentals. Luna: Restaurant prices have been sticky, but even there, wage growth is outpacing menu price increases. Lucas: The Bureau of Labor Statistics data shows that 'food away from home' prices are up about 3.2% year over year. Average hourly earnings are up 3.7%. So your raise is covering that extra dollar on a burger. Luna: It's a small margin, but it adds up over a week-long trip. Lucas: Let's talk about the one exception: car rentals. Those prices have been volatile. But even they are down about 5% from their peak in 2023. Luna: So the overall picture is pretty clear: if you've been putting off a vacation because you thought it was too expensive, the math might actually work now. Lucas: And it's not just a coincidence—it's the result of specific market dynamics. Airline capacity discipline is breaking down as more planes enter service. Hotels are facing competition from short-term rentals. And wage growth, while modest, is consistently above travel inflation. Luna: So what does this mean for the rest of the year? Will it last? Lucas: That's the big question. The 10-year breakeven inflation rate—the market's expectation for average inflation over the next decade—is at 2.23%. Down slightly from a few weeks ago. So the bond market thinks inflation is under control. Luna: That would mean wage growth should continue to outpace price increases, at least for the next year or two. Lucas: But there are risks. If the labor market softens too much—if we start seeing job losses instead of just slower hiring—then wage growth could stall. And if that happens, the vacation advantage disappears. Luna: So the window is open now, but it might not stay open forever. Lucas: Exactly. And that's why the data matters. The June payroll number—57,000—is a warning sign. It's not a collapse, but it's a deceleration. If next month's number comes in similar or worse, the Fed might start worrying less about inflation and more about employment. Luna: Speaking of which, Christine Lagarde is signaling a potential early exit from the ECB, which could shake things up globally. But for the US consumer, the near-term outlook is still favorable. Lucas: Yeah, the European situation is interesting, but for our purposes today, the message is: your raise is finally beating the cost of a vacation. And that's a real shift. Luna: I know we talk a lot about the big picture—inflation, wages, policy—but honestly, if this episode made you think about your own finances a little differently, that's kind of the whole point. Lucas: Yeah, if walking through the economy with us has made something click, and you've gotten value from it, there's a simple way to support the show. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: We keep it ad-free, and listener support is what makes that possible. So if you're inclined, that's the place. Lucas: Alright, back to the trends. One more data point I want to highlight: the employment cost index for wages hit 177.5 in the first quarter of this year, up from 176.23. That's a 0.7% quarterly increase. And when you annualize that, you're looking at nearly 3% wage growth just from that index alone. Luna: And compare that to the PCE price index, which the Fed watches closely. The core PCE is at 130.1, up from 129.67. That's about a 0.3% monthly increase. Lucas: So wages are growing roughly twice as fast as prices, at least in the core measure. That's the kind of gap that gives workers real purchasing power gains. Luna: And this isn't just about vacations. It's about the broader consumer environment. If people feel like they can afford a trip, they're more likely to spend on other things too. Lucas: That's the multiplier effect. And it's why the Fed is walking such a tightrope. They want to keep the labor market strong enough to support wage growth, but not so hot that it reignites inflation. Luna: For now, that tightrope seems to be working. The vacation industry is the canary in the coal mine—if prices start rising again there, we'll know something has shifted. Lucas: So keep an eye on the July CPI report when it comes out next month. The travel subindices will be a key signal. But for this summer at least, pack your bags. Luna: Your raise has got your back. Lucas: That's it for this episode of Wages and Prices. We'll be back tomorrow with another angle.