Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Growing Faster Than Car Payments for the First Time
Transcript
- Lucas: The average new car payment in the U.S. right now is about $750 a month. That's up roughly 15 percent from two years ago. But here's the number that actually stopped me: the average weekly paycheck for a private-sector worker is now about $1,500. That means a car payment eats up exactly half a week's gross pay. Luna: Half a week. That's brutal. But I thought wages were finally growing faster than inflation? How does that square with car payments still climbing? Lucas: It does square—and that's actually the story. Because while car payments are up 15 percent over two years, average hourly earnings have risen about 7 percent just in the past 12 months. So the gap is narrowing. Back in 2021, that same $750 payment represented closer to 60 percent of a week's pay. We're down to 50 percent now. Luna: So the raise is helping. Just maybe not enough for anyone to feel like they're getting ahead. Lucas: Right. And this is exactly the kind of real-wage story that gets buried in the national averages. Because the CPI headline says prices are up, wages are up—but the real friction is in specific big-ticket items. Cars are the second-largest purchase most households make after housing. So when the ratio of car payment to paycheck improves, that's a tangible win—even if it's from 'impossible' to just 'really hard'. Luna: And what about the used car market? Because a lot of people aren't buying new. Lucas: Used car prices have actually been falling. The Manheim Used Vehicle Index is down about 8 percent from its 2023 peak. So if you're buying used, your payment might be $450 to $500 a month. That's about 30 percent of a weekly paycheck. Still high, but much more manageable. And that's where we're seeing the biggest improvement in affordability. Luna: But there's a catch, right? I mean, loan terms are stretching out. People are taking 72-month, even 84-month loans to keep the payment low. Lucas: Exactly. And that's the dark side. The average new car loan term is now 68 months. Seven years of payments means you're underwater on the car for most of that time. And the Fed's data shows auto loan delinquencies at 4.2 percent—the highest since 2012. So the raise is helping people qualify, but it's also masking the fact that households are taking on more debt to get into a car. Luna: So the raise is real, but it's being offset by longer loans and higher interest rates. That feels like the theme of this whole year. Lucas: It is. And that's why the jobs report this Friday matters so much. If wage growth stays above 4 percent, the ratio keeps improving. But if the labor market softens and wage growth slows, that improvement stalls. The ADP numbers from Wednesday showed 122,000 private payrolls added in May—solid, but not booming. So the picture is fragile. Luna: Speaking of fragility, I want to bring in something I saw in the data. The employment cost index for wages hit 177.5 in January. That's up about 1.8 percent from the previous quarter. But core PCE is still running at 2.8 percent. So wages are growing slower than the Fed's preferred inflation measure. How does that not mean purchasing power is still shrinking? Lucas: That's a really good point—and it gets to the difference between the CPI and PCE. CPI is running at about 3.2 percent year-over-year right now. PCE is lower, around 2.6 percent. So if you use PCE as your inflation benchmark, real wage growth is slightly positive. If you use CPI, it's roughly flat. The 'real wage growth is back' narrative depends entirely on which index you pick. Luna: So for the person buying a car, they're feeling cpi level inflation—because car prices and insurance are in the CPI basket. Lucas: Exactly. And that's the disconnect. The macro data says real wages are up 0.3 percent. But if you bought a car in the last two years, your insurance alone is up 20 percent. Your payment is up 15 percent. Your raise feels like it's barely treading water. And yet, the fact that the ratio has improved from 60 percent to 50 percent of a week's pay—that's a real structural shift. It's just happening slowly. Luna: Let me ask you this: is there any industry or region where this improvement is more pronounced? I'm thinking about the auto manufacturing towns—Detroit, Toledo, places like that. Lucas: Yes, and this is where the story gets really interesting. In the Midwest, where auto plant wages have risen sharply due to the UAW contracts last year, the average production worker's weekly pay is now closer to $1,600. That same $750 car payment is only 47 percent of their weekly check. Meanwhile, in coastal cities where wages are higher but car payments are also higher—say, $850 a month in L.A.—the ratio is still over 50 percent. So geography matters a lot. Luna: So the raise is helping more in the places where cars are built. That's a neat symmetry. Lucas: It is. And it's a reminder that when you hear 'wages are up 4 percent,' that's an average. The distribution matters. Unionized auto workers got raises closer to 7 percent. Service workers got 3.5 percent. And if you're a non-union parts supplier, maybe 2 percent. So the car payment burden is lifting fastest for the people who make the cars—but not for everyone else. Luna: That's a good lens to look at the broader economy through. I mean, we talk a lot about wage growth vs. rent, but car payments are this huge fixed cost that doesn't get as much attention. Lucas: Right. And one more number that puts it in perspective: the average household with a car loan spends 12 percent of their gross income on auto payments. That's down from 14 percent in 2022. So the improvement is real—but it's slow, and it's uneven. For households that had to buy a car in 2022 or 2023, they locked in that high payment. For someone buying today, they're getting a slightly better deal. Luna: And the people who are really feeling the pain are those who can't afford a new or even a used car—they're stuck in the repair loop, spending on maintenance. Lucas: That's a whole other episode. But yeah, the repair costs are up 15 percent too. So there's no easy escape. Luna: Hey, I want to take a quick moment—because this show is ad-free and listener-supported, and that's honestly the only reason we can do deep dives like this. A small group of listeners already keeps it going through buy me a coffee dot com slash fexingo. If you've found these numbers helpful, that's the way to keep it sustainable. Lucas: Yeah, and we really mean that. No ads means we can spend the whole episode on one ratio, one number, without having to speed through it. So thanks to everyone who's chipped in. Luna: Alright, back to the data. One thing I want to flag: the 10-year breakeven inflation rate is at 2.36 percent, basically flat. So the bond market is betting that inflation is contained. If that holds, wage growth should continue to outpace prices gradually. Lucas: And that's the bull case for car affordability: if inflation stays anchored and wages grow at 4 percent, by next year that $750 payment could be 46 percent of a week's pay. That's meaningful. But it assumes no recession, no spike in oil prices—which, given the headlines this week on Iran, is not a given. Luna: Right. So the improvement is real, but fragile. And it's happening at a pace that most people won't feel in their monthly budget. Lucas: Exactly. And that's the honest takeaway: your raise is slowly catching up to your car payment, but you probably haven't noticed. And you shouldn't feel bad if you haven't—because the improvement is measured in percentage points, not in dollars left in your pocket at the end of the month. Luna: Well said. Next week we'll look at another big fixed cost that's shifting. Until then, keep an eye on that ratio.