Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Finally Beating the Cost of Prescription Drugs
Transcript
- Lucas: You know, Luna, for years it felt like every time you walked into a pharmacy, the price on the shelf had gone up again. But something interesting is happening now — wage growth is finally catching up to prescription drug costs. Luna: Really? Because I just refilled a prescription last week and it still stung. Lucas: It still stings, absolutely. But look at the numbers. Average hourly earnings for private workers hit 37 dollars and 60 cents in June — up from 37.51 the month before. That's roughly a 2.5 percent annualized gain. Meanwhile, the overall CPI actually ticked down from May to June, and within that, prescription drug prices — which had been climbing faster than overall inflation — have been moderating. Luna: So the gap is shrinking? I know the employment cost index for wages was up too, by about a point and a half. Lucas: Exactly. The employment cost index — wages — hit 177.5 in the first quarter, a 1.4 percent quarterly rise. And the core PCE, the Fed's preferred gauge, is still running warm at 130.1, but medical care services inflation has eased. The combination means that for the first time in a while, the average worker's raise is outpacing the increase in what they pay for medication. Luna: What's driving the moderation on the drug side? Is it the generic drug tariffs the government is threatening? Lucas: Partly. The administration announced plans in late July for generic drug tariffs starting in 2028 — a two-year delay to encourage onshoring. That uncertainty may have prompted manufacturers to hold prices steady. Also, import prices from China hit their highest since 2008 in June, but that's mostly for goods other than pharmaceuticals. For drugs, the pipeline of generic approvals is still strong, and that competition keeps a lid on prices. Luna: So for a family spending, say, 500 dollars a month on prescriptions, how much are they actually coming out ahead? Lucas: A 500-dollar monthly drug bill is about 115 dollars a week. If their weekly paycheck rises by 12 dollars — which is roughly what a 2.5 percent raise on a 480-dollar weekly wage gives you — and drug costs only rise 1.5 percent annually, that's about a dollar seventy-five more per week on meds. So net, they're ahead by roughly 10 dollars a week. Not a windfall, but real progress. Luna: But that only works for people who actually got a raise. What about retirees on fixed incomes, or part-time workers? The ten-year breakeven inflation rate is down to 2.26 percent, so markets expect inflation to stay moderate, but if you're on Social Security, your COLA might not track the same basket. Lucas: That's the catch. This is a story for employed workers. For people on Medicare or without a job, drug prices still hurt — and even for workers, the raise might come with higher health insurance premiums. The employment cost index includes benefits, and those are rising faster than wages. But on the narrow question of drug prices at the pharmacy counter, the trend has flipped. Luna: And it's not just drugs. The broader CPI drop to 332.6 means other categories are also cooling. But drugs were a particular pain point — they were running at 4 to 5 percent inflation a couple years ago. Lucas: Right. In 2023, prescription drug CPI was up over 4 percent year-over-year. Now we're seeing maybe 2 percent. And with core CPI ex food and energy essentially flat at 336.1, the overall inflationary environment is much friendlier. That gives the Fed room to ease off, even though the core PCE is still a bit sticky. Luna: So from a policymaker's perspective, this has to be encouraging. The Fed watchers parsing Kevin Warsh's language — he's focused on three key phrases — are probably noting that services inflation is softening. Lucas: Exactly. And that's the thread I want to pull on. If the wage-price spiral truly is unwinding in health care services, then the Fed can declare victory on inflation without tanking the labor market. The unemployment rate is still low, and the Russell 2000 was down slightly over the past five days, but the broader market is near all-time highs — the S&P 500 at 7,412, the Dow above 51,900. Luna: Of course, there's a distributional question. The gains aren't even. Lower-wage workers in retail or hospitality might not have the same bargaining power to demand raises that outpace drug costs. Lucas: True. But even at the bottom, wages are rising — median usual weekly earnings hit 1,204 dollars in 2025, up from 1,159. That's about 4 percent growth. So the trend is broad. The question is whether it's durable. Luna: And whether the tariffs on generic drugs from 2028 end up backfiring. If onshoring doesn't happen fast enough, we could see import prices spike again. Lucas: That's the risk. For now, though, the data is clear: your raise is finally beating the cost of prescription drugs. And if walking through the economy with us has made that picture a little clearer, I'll just say that listener support is what keeps this show ad-free — you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to ensure we keep digging into numbers like these without any corporate pressure. We appreciate everyone who chips in. Lucas: Absolutely. And speaking of durability, next time we'll look at whether this wage advantage can survive a potential recession. Because the bond market is already pricing in lower breakevens. Luna: That sounds like a great follow-up. For now, though, it's nice to have some good news on the cost of living front. Lucas: Agreed. For Fexingo Business, I'm Lucas. Luna: And I'm Luna. Keep your receipt.