Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Real Wages Are Finally Catching Up
Transcript
- Lucas: Look, if you’ve been listening to this network for any length of time, you know I’m obsessed with the gap between nominal numbers and actual lived experience. And right now, that gap is closing faster than most analysts are admitting. Luna: You mean the fact that despite everything we’ve heard about sticky prices, people are actually feeling a bit more breathing room? Because the data from August supports that theory. Lucas: Exactly. Let’s look at the August CPI report. Core CPI came in at 337.8, up slightly from 336.79 in July. On the surface, that sounds like inflation is still ticking upward. But when you layer that against average hourly earnings, which rose to 37.8 dollars from 37.65 dollars, the picture changes completely. Luna: So even though prices went up, wages went up just enough to offset it? That’s a subtle but massive shift from last year. Lucas: It’s not just a shift; it’s a structural reset. For the better part of three years, real wages were negative. Workers were earning more dollars, but those dollars bought less stuff. Today, with the unemployment rate flat at 4.10 percent and job openings holding steady at 7.2 million, the labor market isn’t cooling so much as it is equilibrating. Luna: I love that word, equilibrating. It feels less dramatic than 'cooling,' but it explains why consumer sentiment hasn’t collapsed yet. Lucas: Right. And here is the thing most headlines miss: they focus on the headline CPI number, which was 334.1. But for families trying to plan their budgets, core CPI and hourly earnings tell the truth. If your pay raises by four percent and your core costs rise by two percent, you’re richer. You have more discretionary income. Luna: That discretionary income is exactly what keeps the retail sector alive right now. We’re seeing it in the service economy where margins are thin. Lucas: Before we dive deeper into the implications for Q4 spending, I want to take thirty seconds to talk about how this show exists. We don’t run ads. We don’t sell your data. The only reason we can produce daily episodes like this, with deep dives into macro data, is because a small group of listeners chip in monthly through buy me a coffee dot com slash fexingo. It’s literally what funds the research behind every script. Luna: Yeah, and if you’ve ever found one of these conversations useful, consider joining them. It helps us keep the signal clean and the noise out. Lucas: Thanks for supporting independent business journalism. Now, back to the numbers. The key metric here is the divergence between nominal GDP and real GDP. Nominal GDP hit 32.4 trillion dollars, while real GDP grew at an annualized rate of only 1.50 percent. Luna: That spread tells us a lot about pricing power. Companies aren’t selling more volume; they’re raising prices. But if wages are keeping pace, who is absorbing that cost? Lucas: The consumer is absorbing it, but they’re doing so without going bankrupt. That’s the critical distinction. In 2022, inflation ate 5 percent of purchasing power. In 2026, with average hourly earnings at 37.8 dollars, we’re seeing wage growth track closely with core inflation. It’s not perfect parity, but it’s no longer a bleed. Luna: So the Fed can afford to be patient. They don’t need to smash the labor market to stop inflation because inflation is already being constrained by consumer demand elasticity. Lucas: Precisely. And that brings us to the interest rate environment. The Fed Funds effective rate is sitting at 3.63 percent. With inflation expectations anchored around the 2.36 percent breakeven on the ten-year Treasury, the real cost of borrowing is manageable for businesses that have locked in rates. Luna: But what about the small businesses that haven’t locked in? Are they feeling the pinch of that 3.63 percent versus the 4.96 percent on the ten-year? Lucas: They are, and that’s where the story gets nuanced. The yield curve is inverted, yes. Ten-year yields are near 5 percent. But for a company with strong pricing power and rising wages, the debt service is affordable. The risk isn’t default; it’s stagnation. Luna: Stagnation rather than crisis. That’s a much healthier place to be. It suggests the soft landing is actually a slow crawl. Lucas: A slow crawl that feels like walking uphill. But let’s look at the nonfarm payrolls. We added 159 thousand jobs in August. The JOLTS report shows 7.2 million openings. This isn’t a labor shortage anymore; it’s a labor stability. Luna: And initial jobless claims dropped to 206 thousand. People aren’t getting fired en masse. They’re staying put. That retention is what drives the wage growth we’re seeing. Lucas: Retention drives wages because employers have to bid for talent. But here’s the twist: the bid isn’t just for high-skill tech roles. It’s for healthcare, hospitality, and logistics. Look at the average hourly earnings across the board. It’s broad-based. Luna: Broad-based wage growth is the ultimate hedge against recession. When everyone has money, no one cuts back drastically. The cycle sustains itself. Lucas: Which makes the S&P 500’s recent performance interesting. The index is down half a percent over the last five days, hovering at 7,638. Markets are nervous about the 1.5 percent real GDP growth. But consumers aren’t acting nervous. Luna: Consumers are acting normal. Which means the corporate earnings reports might surprise to the upside if they weren’t already priced in for doom. Lucas: Doom is bad for business, but it’s easy to model. Normalcy is hard to model. And right now, the normalcy is driven by households that feel like their paychecks are worth something again. That’s the single biggest tailwind for the rest of 2026. Luna: So, if you’re an investor or a worker, stop watching the headline CPI and start watching the gap between your raise and your grocery bill. Lucas: Spot on. The gap is closing. And when the gap closes, confidence returns. Confidence drives investment. Investment drives growth. It’s a virtuous circle, not a vicious one. Luna: It’s a reminder that economics isn’t just about central bank mandates. It’s about whether you can afford to buy dinner this weekend. Lucas: And this weekend, for the first time in a while, the answer is probably yes. As long as you stick to core services, of course. Luna: Don’t spend it all on energy bills. Though, honestly, given the ten-year yield, maybe invest some of it. Lucas: Good advice. We’ll see where the data takes us next week. Until then, keep your eye on the hourly earnings report. Luna: And your wallet. It’s the only gauge that really matters in the end. Lucas: Thanks for listening.