Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Wage-Price Spiral Myth and Your Wallet
Transcript
- Lucas: If you’ve looked at the latest inflation numbers from early July, you might have noticed something odd. Headline CPI came in at 332.8, which is barely moving off the plateau, but when you strip out food and energy to look at Core CPI, it’s sitting higher at 336.8. That gap between the headline number and the core number is where the real story lives for most people. Luna: Right, because goods prices have actually come down due to better supply chains, so the pain has shifted almost entirely into services like healthcare, housing, and personal care. Lucas: Exactly. And the reason I’m bringing this up today is that we keep hearing the phrase 'wage-price spiral' thrown around by economists who haven’t shopped for groceries recently. The narrative is that if wages go up, prices must go up to match. But the data from the last few quarters suggests that relationship is breaking down, or at least becoming much more complicated. Luna: I think people feel that disconnect personally because their rent and insurance premiums aren’t dropping, even if the price of electronics is stabilizing. Lucas: That’s the key distinction. Goods are deflationary right now. You can buy a TV or a laptop for less relative to income than you could three years ago. But services? They are intensely labor-driven. If you run a dental practice, a hair salon, or a home repair business, your biggest cost is not the drill bit; it’s the person turning it. And labor is still expensive. Luna: So the 'spiral' isn't happening because workers are demanding more money to cover inflation, but because there simply aren't enough workers to do the work without paying a premium? Lucas: Precisely. It’s a structural labor shortage in specific sectors, not a general wage boom across the board. Look at the August payroll data released just last Friday. Payrolls rose by 162,000, which is stronger than expected, and the unemployment rate is sitting at 4.1 percent. That sounds healthy, but it means the labor market is still tight enough to prevent service prices from falling back down. Luna: And with women accounting for almost all the job gains, does that mean certain service categories are seeing different pressure points than others? Lucas: It does. A huge chunk of those jobs are in healthcare support, education, and leisure and hospitality. These are exactly the sectors where Core CPI remains sticky. When you add up the cost of a doctor’s visit, a nursing home stay, and a family vacation, those prices don’t respond to interest rates quickly. They respond to availability. Luna: Which makes the Fed’s position really awkward because they’re trying to cool inflation, but they can’t easily 'cool' the fact that there aren't enough nurses or teachers to drive those wages down. Lucas: That’s the trap. The Fed controls borrowing costs, not headcount. If they keep rates high to try and force a recession that would free up labor, they risk crashing the housing market and hurting borrowers who are already stretched. But if they cut rates, they might reignite demand in goods, which could push headline inflation back up. Luna: It feels like we’re stuck in a middle ground where nothing gets dramatically worse, but nothing gets dramatically better either. Lucas: For the listener watching their wallet, here is the concrete takeaway: stop expecting your service costs to drop soon. Healthcare, insurance, and housing-related services are likely to remain elevated until the demographic shift in the workforce accelerates or productivity improves in those specific sectors. Luna: So budgeting for these expenses needs to assume they are fixed costs rather than variable ones that will shrink over time. Lucas: Correct. And that changes how you plan. If you’re looking at long-term care for aging parents, or planning for retirement, you need to model those service costs using the Core CPI trend, not the headline number. The headline number is misleadingly low because it’s being dragged down by cheaper stuff you buy once every five years. Luna: It’s a subtle but important difference in how you view your annual budget versus your monthly cash flow. Lucas: Let me pause here for a second. If walking through the economy with us has made something click, specifically helping you untangle why your bills feel heavy while the news says inflation is cooling, then the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo keeps the research deep and the ads away. Luna: Yeah, it really helps us dig into these specific data points instead of just skimming the headlines. Lucas: Back to the mechanics of why this matters for your portfolio. You might be wondering if this sticky inflation means the Fed won’t cut rates as fast as the market hopes. Luna: Because if service prices don’t fall, the Fed can’t declare victory and start easing aggressively without risking a resurgence. Lucas: Right. The Fed Funds rate is currently sitting at 3.63 percent. The market has been pricing in cuts, but if Core PCE, which is the Fed’s preferred gauge, stays above 2.5 percent, the FOMC members will hesitate. They see the labor market as too strong to justify a rapid pivot. Luna: So the bond yields might stay elevated longer than investors want, especially in the shorter end of the curve. Lucas: Exactly. And this brings us to the international context. Japan just reported a record drop in foreign reserves following yen intervention. While that seems far removed from your local grocery store, it shows how global capital flows are reacting to divergent monetary policies. The US is staying higher for longer, which supports the dollar and keeps import prices stable, masking some domestic inflation. Luna: But that only works if other countries don’t crash hard. If global demand falls, our export-dependent sectors suffer, which could eventually feed back into domestic employment. Lucas: A valid concern, but for now, the domestic labor market is absorbing the shock. The 162,000 new jobs in August were broad-based, not concentrated in just one volatile sector. That resilience is what’s keeping Core CPI pinned at 336.8. Luna: It’s interesting how the definition of 'normal' is shifting. What felt like high inflation two years ago is now just the baseline for services. Lucas: And that normalization is dangerous because it lowers expectations. People get used to paying more for a haircut or a hospital visit, and they stop negotiating or shopping around. Businesses know this. Once prices move up in services, they rarely move back down, even if competition increases. Luna: So the friction is cultural as much as it is economic. We accept the higher floor. Lucas: Almost. But there is one lever left. Productivity. If AI and automation start making individual service workers more efficient—say, a nurse can manage more patients with digital tools, or a mechanic can diagnose cars faster—that increases the effective labor supply. That’s the only thing that can break the wage-price link in services. Luna: But adoption is slow. Hospitals and schools are bureaucratic labyrinths. They don’t implement tech overnight. Lucas: True. So for the next couple of years, expect the 'sticky' environment to persist. Your strategy should be to lock in fixed-rate debt where possible, because variable rates tied to the Fed’s hesitation will hurt you more than the benefits of lower asset prices help you. Luna: Or, if you’re in a service-heavy industry, focus on efficiency gains rather than waiting for wage pressures to ease. Lucas: Spot on. The era of easy money is over, and the era of cheap services is paused. Navigating that requires looking past the headline CPI and understanding the structural shifts underneath. Luna: It makes you wonder if the next big investment opportunity isn’t in stocks, but in companies that solve the labor shortage directly. Lucas: That’s a compelling thought. Automation as an inflation hedge. We’ll leave you with that question as you review your own service contracts and budgets this week.