Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Your Raise Is Real but This Unexpected Cost Is Stealing It
Transcript
- Lucas: Luna, I want to start with a number that should be good news: average hourly earnings for private-sector workers hit thirty-seven dollars and forty cents in April. That's up from thirty-seven thirty-five the month before, and it's part of a steady climb we've seen for over a year. Luna: And the employment cost index for wages is also up. On paper, workers are getting paid more. So why does it still feel tight out there? Lucas: Because there's one cost that's quietly eating that raise. And it's not rent this time. It's energy. The Iran war has pushed up gas and heating costs in a way that's hitting households right now. CNBC reported today that the average U.S. household is spending about four hundred and fifty dollars more on gas and energy compared to before the conflict escalated. Luna: Four hundred and fifty dollars — that's not a rounding error. That's basically the annual raise for a lot of workers. Lucas: Exactly. Let's put it in context. The median usual weekly earnings in the U.S. are about twelve hundred and four dollars. That's roughly sixty-two thousand a year. A typical raise might be three to four percent, so call it two thousand to twenty-five hundred dollars. Now take four fifty off the top for energy. That's nearly a fifth of your raise gone before you even see it. Luna: And energy isn't something you can opt out of. You need to heat your home, fill your tank. So it's not like you can just cut back the way you might on restaurants or clothing. Lucas: Right. And the Fed's preferred inflation gauge — the core PCE price index — came in at three point three percent annualized for April. That's exactly what economists expected. But the headline number masks what's happening underneath. Core PCE strips out food and energy. So that three point three is actually the ‘good’ number. If you include energy, the real inflation bite is higher. Luna: So the Fed is looking at the number that excludes the very thing that's hitting households hardest. That feels like a disconnect. Lucas: It's a deliberate choice. The Fed focuses on core because food and energy prices are volatile. But in this case, the volatility isn't random — it's driven by a geopolitical shock that shows no signs of fading. Minneapolis Fed President Neel Kashkari said yesterday that the inflation fight takes priority because the labor market is in decent shape. But decent shape for the macro economy doesn't mean decent shape for a household that just saw their gas bill jump. Luna: And Chicago Fed President Austan Goolsbee also noted that energy inflation has been more persistent than expected. So even the Fed is acknowledging this isn't a blip. Lucas: That's the key word: persistent. The ten-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, is at two point three nine percent. That's essentially flat. So the bond market doesn't see a long-term spiral. But in the short term, workers are absorbing a cost shock that the Fed's preferred metric doesn't fully capture. Luna: Let's talk about that four hundred and fifty dollar number. How does that break down? Is it all at the pump, or is it also home heating, electricity? Lucas: The CNBC report breaks it out as mostly gasoline and home energy. The Iran war disrupted shipping routes in the Strait of Hormuz and pushed up crude prices. That flows straight to the pump. But it also affects natural gas prices, which is a big deal for home heating in many parts of the country. So it's a double hit. Luna: And this comes at a time when core inflation is still above the Fed's two percent target. So the central bank is stuck. They can't cut rates to stimulate the economy because inflation is still sticky, but they also can't ignore that the energy shock is acting like a tax on workers. Lucas: That's exactly the bind. And it's why the consumer sentiment numbers have been so low. The University of Michigan survey hit a record low earlier this year, and despite a strong labor market, people are still pessimistic. The ‘vibecession’ people talked about in 2023 and 2024 — it's back, but with a real, measurable cause this time. Luna: I want to zoom in on one group that's especially vulnerable. Workers who drive for a living — delivery drivers, rideshare drivers, truckers. Their income is directly tied to fuel costs. A raise might be completely eaten by higher gas expenses. Lucas: Great point. If you're an Uber driver or an Amazon delivery driver, your cost of doing business just went up. And unlike a salaried office worker, you can't absorb that by cutting back on your commute. Your commute is your job. So the raise you got in April might have been totally offset by May's gas prices. Luna: And there's another angle I want to touch on: the timing. The raise data we're looking at is from April. The energy shock is from May. So the raise you got last month is already worth less this month. That lag is brutal. Lucas: That lag is actually the whole story of this episode. Workers see a higher paycheck, but by the time they spend it, the prices have already moved. And energy moves fast — it changes week to week. Your raise is fixed until your next review. So you're playing catch-up constantly. Luna: You know, Lucas, this kind of deep dive into what's actually happening to people's wallets is exactly why I love doing this show. We try to cut through the noise and connect the dots between the macro data and the micro reality. If walking through the economy with us has made something click for you, we'd be grateful if you considered supporting the show. It's listener-supported, so every bit goes to keeping us ad-free and independent. You can do that at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does help. We don't run ads, we don't have sponsors, so it's just you and us figuring this out together. Okay, back to the energy shock. One more data point I want to bring in: the overall CPI, which includes energy, was at three hundred thirty-two point four in April. That's up from three hundred thirty point three in March. The month-over-month increase was driven largely by energy. Luna: So if we look at the wage growth numbers relative to that, average hourly earnings went from thirty-seven thirty-five to thirty-seven forty. That's a five-cent increase. Meanwhile, CPI went up about two points. The math doesn't work in the worker's favor. Lucas: It really doesn't. And that's the puzzle that economists are wrestling with. The labor market is tight, unemployment is low, companies are still hiring — but the purchasing power of those wages is being squeezed by forces outside of the labor market. The Fed's tools are blunt instruments for dealing with a supply shock like an oil price spike. Luna: What would actually help? I mean, is there a policy lever that could cushion this for households? Lucas: In the short term, the most direct tool would be something like a temporary energy tax cut or a direct payment to households, like the stimulus checks during COVID. But politically, that's a non-starter right now. The fiscal environment is tight, and there's no appetite for more spending. The Fed could cut rates, but that would risk fueling inflation further. So we're in a wait and see mode. Luna: And that wait and see is painful for the worker who's already feeling the pinch. Let's talk about what they can actually do, if anything. Lucas: On an individual level, not much. You can try to carpool, adjust your thermostat, maybe refinance if you have a variable-rate loan. But those are marginal. The real solution would be a structural shift away from fossil fuel dependence, but that's years away. For now, it's about awareness — knowing that the raise on your pay stub isn't the full story. Luna: And that's the takeaway I hope listeners get. Your raise is real, but it's being eaten by a cost you can't control. That doesn't mean you shouldn't ask for more, but it helps to understand the full picture. Lucas: Right. And the other side of it is that this too shall pass. Energy shocks tend to be cyclical. The Iran situation could de-escalate, or supply could adjust. But in the meantime, the data shows that workers are absorbing a real hit. We'll keep tracking it. Luna: Thanks for digging into this, Lucas. Next time, let's look at whether wage growth is keeping up in specific sectors — maybe healthcare or manufacturing — where the dynamics might be different. Lucas: I like that. There's a lot of variation under the hood. See you next time.