Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Real Wage Growth Finally Turned Positive in 2026
Transcript
- Lucas: So we have been tracking this dynamic for months now where your raise shows up on paper but seems to vanish before you feel it. Inflation was the thief, rent was the thief, energy costs were the thief. But the May data just dropped some numbers that make me think that story is finally changing. Luna: I saw the average hourly earnings number: $37.50. That's up from $37.41 in April. Not a huge jump, but combined with the CPI, the math looks different. Lucas: Exactly. And the CPI for April — that's the most recent full month we have — came in at 332.4. That's up about 0.6% from March's 330.3. So prices are still rising, but wages are rising faster. Let me put some numbers on this. Year-over-year, average hourly earnings are up about 4.2%. The CPI year-over-year? That's running around 3.4%. So the gap has flipped positive. Luna: That's the first time that's happened since, what, early 2021? Lucas: Roughly. And the thing is, core CPI — which strips out food and energy — is still at 335.4, up about 3.8% year-over-year. So that's stickier. But the headline number is the one that hits people's wallets. And for the first time in years, your raise is actually raising your purchasing power in real terms. Luna: Let's talk about why this is happening. Is it because wages are accelerating, or because inflation is decelerating? Lucas: It's mostly the second one. Wage growth has actually been pretty steady — around 4% to 4.5% for the last year or so. What's changed is that inflation has come down from its peak. Remember, CPI peaked at over 9% in mid-2022. Now it's at 3.4%. So the denominator is growing more slowly, and that makes the real wage math work. Luna: So the Fed's rate hikes finally did what they were supposed to do. Lucas: That's the argument. The 10-year breakeven inflation rate is sitting at 2.36% — basically flat. That tells you the bond market thinks inflation is anchored. And when inflation expectations get stable, wage negotiations become less frantic. Employers don't feel like they have to give huge raises just to keep up with next month's prices. Luna: But there's a catch, right? Because core inflation is still above 3%. So the 'real wage' story depends on which inflation measure you use. Lucas: That's the nuance. If you look at the PCE price index — the Fed's preferred measure — it's at 130.9, up about 2.7% year-over-year. Core PCE is 129.6, up about 2.5%. So by those measures, real wage growth is even stronger. The gap between wage growth and core PCE is close to 1.7 percentage points. That's real. Luna: So which workers are actually feeling this? Because average numbers can hide a lot. Lucas: Median usual weekly earnings — that's the midpoint — came in at $1,204 for all workers as of early 2025. That's up from $1,159 a year before. About 3.9% growth. So the typical worker is seeing a raise that's roughly in line with the average. But the big shift is that lower-wage workers have seen faster gains over the past two years — tight labor markets really helped at the bottom. The question is whether that continues. Luna: And we have the May jobs report coming out on Friday. That's going to be the next big data point. Lucas: Right. The ADP private payrolls number came in at 122,000 for May, which was stronger than expected. So the labor market is still adding jobs. But long-term unemployment is surging — that was in the headlines this week. So the composition matters. If people are dropping out of the labor force, the wage numbers might look artificially good. Luna: Let's step back. If real wage growth is finally positive, does that mean the 'vibecession' is over? Lucas: I think it's too early to declare victory. Consumer sentiment has been recovering, but it's still below pre-pandemic levels. The thing is, people don't just look at their paycheck. They look at their rent, their grocery bill, their insurance premiums. And those have gone up so much in the last few years that even a positive real wage growth feels like a slow catch-up. Luna: So the psychological recovery lags the statistical one. Lucas: Exactly. And that's why this show exists — to explain the gap between the numbers and the experience. But I do think this is a genuinely good data point. For the first time in years, if you got a 4% raise, you can actually buy slightly more stuff than you could last year. Luna: I want to dig into one thing though. The employment cost index for wages — that's a broader measure including benefits — it's at 177.5, up from 176.23 at the start of the year. That's only about 0.7% growth in the first quarter. So total compensation isn't growing as fast as hourly earnings. Lucas: That's a great point. The ECI includes things like health insurance premiums, which have been rising fast. So if your employer is spending more on your benefits, that leaves less room for cash wage increases. The hourly earnings number captures the cash part, but the total compensation picture is more mixed. Luna: So the real wage story is real, but fragile. Lucas: Fragile and uneven. And it depends on inflation staying low. If energy prices spike again — we've got the Iran situation, tariffs being proposed on 60 economies — there are plenty of upside risks to inflation. So this window of positive real wage growth could close. Luna: And that's exactly why it's worth paying attention to right now. Lucas: Yeah. And on that note, we've been doing this show for 34 episodes now, diving into the data every week. It's a lot of work, but we genuinely think it's valuable — especially because we keep it ad-free. If walking through the economy with us has made something click, one way to support that is at buy me a coffee dot com slash fexingo. It helps us keep doing exactly this, without any sponsor interruptions. Luna: Totally. And it's not just us — listeners who chip in make it possible for us to stay independent and focus on the numbers that matter. Lucas: So, back to the data. One thing I want to bring up is what happens after Friday's jobs report. If we see wage growth accelerating too fast, the Fed might feel pressure to hold rates higher for longer. That would hit the housing market, borrowing costs, and eventually the labor market itself. Luna: So there's a Goldilocks zone for wage growth — fast enough to keep up with inflation, but not so fast that it reignites it. Lucas: Exactly. And right now, we're in that zone. The real question is whether we stay there. The bond market seems to think so — breakevens are flat. But the jobs report could shift that. If we see a big payroll beat and average hourly earnings jump, all of a sudden the inflation narrative flips again. Luna: What's your guess for Friday? Lucas: I think we'll see around 180,000 payrolls — solid but not hot. Wages up 0.3% month over month. That would keep the current story intact. But I've been wrong before. Luna: Alright. So the key takeaway for listeners: your raise is finally outpacing prices, but don't get too comfortable — the data can change fast. Lucas: And keep an eye on core inflation. That's the one that tells you whether this is durable or just a head fake. We'll be back when the jobs report drops to break it down.