Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Real Cost of Living Crisis in September 2026
Transcript
- Lucas: Let’s look at the numbers for a second, because the headline today isn’t just about inflation being high, it’s about the disconnect between what employers pay and what consumers actually feel. As of early August, the Employment Cost Index for wages sat at 179.0, which looks like steady growth on paper. But then you flip to the Core PCE price index, which ticked up to 130.7 over the same period. Luna: Right, but the Consumer Price Index is already sitting at 334.1, so the gap between what workers are earning and what they’re spending is definitely widening. It feels less like a correction and more like a structural shift in who bears the cost. Lucas: Exactly. And when you break down the Core CPI, excluding food and energy, it’s at 337.8. That’s the sticky part of inflation that doesn’t respond quickly to interest rate hikes. We are seeing a scenario where nominal wages are rising, but the services component of the economy—things like healthcare, housing services, and personal care—is absorbing those gains before they hit your discretionary spending. Luna: So the raise you got in March didn’t buy you anything new; it just kept you level with the price hike from February. Is that the trap? Lucas: That is precisely the trap. Let’s talk about average hourly earnings for private industry, which were reported at 37.8 dollars in August. On the surface, that’s an increase from 37.65 dollars earlier in the year. But if you look at median usual weekly earnings, which came in at 1,204.0 dollars, the real story is in the hours worked and the intensity of work required to maintain that income. The labor market isn’t cooling; it’s just becoming more expensive for everyone involved. Luna: And yet, consumer sentiment is apparently in the dumps despite this solid underlying data. Goldman Sachs is pointing to lower happiness levels, which seems counterintuitive when employment is strong. Lucas: It’s not counterintuitive if you understand that sentiment tracks out-of-pocket costs, not aggregate employment. You can have a job, you can have a raise, but if your rent goes up by eight percent and your insurance premiums climb by five, you feel poorer. The VIX is hovering near levels that suggest uncertainty, and the S&P 500 is up 0.9 percent over the last five days, but that’s equity performance, not household balance sheet performance. Luna: It’s a classic case of macro indicators looking green while micro reality looks red. Does the Fed see this divergence? Lucas: They see it, but they’re constrained by the ten-year breakeven inflation rate, which is currently at 2.35 percent. That number has crept up from 2.33 percent recently, signaling that markets expect inflation to remain stubbornly above target. The Bank of England defied the Fed’s recent rate-hike lead by leaving rates unchanged, but here in the US, the pressure is mounting on yields to soar, as CNBC noted yesterday. Luna: So the bond market is essentially telling us that they don’t believe the Fed has won the war yet. What does that mean for someone trying to budget in September? Lucas: It means that borrowing costs aren’t coming down fast enough to offset the erosion of purchasing power. When Treasury yields move sharply, as they are right now, it tightens credit conditions for mortgages and auto loans. If you’re carrying debt, your payment is likely higher, and if you’re saving, your real return is being eaten by that 2.35 percent expectation of future inflation. Luna: I’ve been watching my own subscription bills closely. Are services really the main driver here, or is it still goods? Lucas: It’s overwhelmingly services. Goods inflation has cooled significantly, but services like medical care, housing, and transportation services are still running hot. The CPI ex food and energy at 337.8 tells us that the core of the problem is immaterial costs. You can stop buying new TVs, but you can’t stop paying for your apartment or your doctor’s visit. Luna: That’s a tough realization. It makes salary negotiations feel even more critical because the baseline keeps moving. Lucas: Absolutely. And that brings us to the compensation landscape. The Employment Cost Index rose from 177.50 to 179.0 in the second quarter. Employers are paying more, but they’re also demanding more productivity. This is where the 'wage-price squeeze' becomes a 'productivity-wage squeeze.' Workers are earning more, but the cost of doing business has risen so much that margins are thin, limiting the ability to pass on raises without raising prices. Luna: So it’s a circular dependency. Higher wages drive higher prices, which drive demands for higher wages. How do we break that cycle without causing a recession? Lucas: You don’t necessarily break it immediately; you manage through it. The key is liquidity and asset allocation. With the Dow Jones Industrial Average down 0.5 percent over the last five days and the Nasdaq Composite up 2.0 percent, there’s a clear divergence in where capital is flowing. Tech is holding up, but traditional industrials and financials are feeling the pinch of higher yields. Luna: If I’m listening to this and I feel like my paycheck is losing ground every month, what’s one concrete step I can take? Not investment advice, just a behavioral change. Lucas: Audit your fixed costs first. Since services are the inflationary engine, identify which of your monthly obligations are fixed versus variable. Can you refinance a mortgage or negotiate a service contract? If your income is rising nominally but your fixed costs are rising faster, you need to aggressively attack the fixed side. Don’t wait for inflation to drop; optimize your base rate. Luna: That makes sense. Treat your expenses like a portfolio that needs rebalancing rather than a static list. It’s proactive instead of reactive. Lucas: Exactly. And speaking of proactive measures, if walking through the economy with us has made something click, remember that small contributions keep this network running ad-free. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. If you've gotten something out of them, it helps us bring you this kind of deep dive every day. Luna: Yeah, it’s a small gesture that supports the research behind these conversations. Thanks for considering it. Lucas: Back to the data. Let’s look at Japan’s markets flipping the script after their central bank rate hike. It’s a fascinating parallel. While we debate our own yield curve, Japan is adjusting its monetary policy in a way that’s stabilizing their currency and impacting global trade flows. Luna: How does a rate hike in Japan affect a worker in Chicago? Isn’t that too distant to matter? Lucas: It matters because it affects commodity prices and supply chains. If the yen strengthens, Japanese exports become more expensive, which can alter global demand for raw materials. If you work in manufacturing or logistics, that ripple effect is real. The interconnectedness of global central banks means that a decision in Tokyo influences the cost of your inputs here. Luna: So global macro events aren’t just headlines; they’re direct inputs into local inflation. That changes how I view international news. Lucas: It should. Now, let’s circle back to France’s wine production nearing a 70-year low. It sounds niche, but it illustrates the broader point about supply shocks. When agricultural output drops due to climate or economic pressures, prices rise. That’s a tangible example of how external factors compress your purchasing power. Luna: A glass of wine costing more isn’t just a luxury tax; it’s a signal of resource scarcity. It’s easy to ignore until it hits your grocery bill across all categories. Lucas: Precisely. And that’s why the Core PCE at 130.7 is such a critical metric. It strips out the volatile food and energy items, but it includes those service costs that are structurally higher. We are in a phase where the economy is growing, but the distribution of that growth favors capital over labor in terms of real returns. Luna: Capital gets the upside, labor gets the inflation. That’s a stark way to put it, but does the data support it? Lucas: Look at the ROIC, the return on invested capital, versus the growth in average hourly earnings. Corporations are posting strong profits, driving the Nasdaq up 2.0 percent, while workers are chasing a CPI that sits at 334.1. The spread between corporate profitability and household real income is the defining tension of 2026. Luna: So the solution isn’t just better wages, it’s better bargaining power or perhaps a shift in how we value labor in the equation. Lucas: Or, more pragmatically, individuals need to align their expectations with this new reality. Stop expecting the post-pandemic normalization to return. The world is different. Prices are stickier, wages are tighter, and the margin for error is smaller. Financial literacy isn’t about picking stocks; it’s about understanding this dynamic. Luna: Understanding the dynamic is half the battle. The other half is adapting your lifestyle to protect your net worth against it. Lucas: Agreed. And as we head into the rest of September, keep an eye on the next Employment Cost Index release. If that number climbs faster than the CPI, we might see some relief. But if it lags, the squeeze continues. Luna: Until then, it’s about vigilance and smart management. Thanks for breaking down the complexity, Lucas. Lucas: Thanks, Luna. Let’s see if the markets give us any clues tomorrow.