Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Wages Are Finally Beating Grocery Prices
Transcript
- Lucas: So the May CPI report came out last week, and there's one number in there that I think actually changes how you should feel about your paycheck right now. Food at home — grocery prices — rose just 1.8 percent over the past year. Luna: That's the lowest we've seen for groceries in, what, three years? Lucas: At least. Meanwhile, average hourly earnings for private workers are up 4.2 percent year-over-year. So for the first time since the inflation spike in 2021, wage growth is running more than double the rate of grocery inflation. That's a tangible shift in what your money buys at the checkout. Luna: That's a big deal because for years, people felt like every time they got a raise, the grocery bill just ate it up. We've talked about that a lot on this show. Lucas: Right, and that's the key. The headline CPI — all items — is still running at 4.2 percent annually. But that's being dragged up by shelter and energy, which are still sticky. Groceries, though? That category is finally behaving. The question is: does it actually feel that way at the register? Luna: I think that depends on what you're buying. Eggs are still up, but the Bureau of Labor Statistics data shows the broad food-at-home index is barely moving. Let's talk about why that happened. Lucas: Right, let's break it down. A lot of it is supply chain normalization. Remember the bird flu spikes, the fertilizer price surge after the war in Ukraine, the logistics mess through 2022 and 2023? Most of those shocks have fully passed through. Crop yields have been decent, transportation costs have fallen, and retailers are actually competing again on price. Luna: And we're seeing that in the margins. Grocery chains like Kroger, Albertsons — their quarterly reports have been talking about price investments to win back customers. They know shoppers are still price sensitive after the last few years. Lucas: Exactly. So what we have now is a situation where the wage gains that felt like they were just keeping your head above water are actually starting to give you a little breathing room specifically on food. If you're a median worker earning about $1,200 a week, that extra 4.2 percent amounts to about $50 a week more than last year. And if your grocery bill is only up 1.8 percent, you're keeping most of that. Luna: But service inflation is still running hot. Restaurants, haircuts, insurance — those are still going up faster than wages. So people might not feel richer overall, but at least one big chunk of the budget is cooperating. Lucas: And this is the real story of 2026 so far. The composition of inflation is shifting. Goods deflation or disinflation, services inflation sticky. For the average household, food is the biggest discretionary necessity. If that's under control, it frees up cash for other things — or for savings. Luna: Speaking of savings, the personal saving rate has been hovering around 3.8 percent. That's low. But if grocery prices stay cool and wages keep growing, that number could tick up. Lucas: I think that's the hope. The Fed is watching core PCE more closely, but the CPI breakdown matters for consumer sentiment. And consumer sentiment has been terrible — the University of Michigan survey has been in the low 60s. But if people start seeing that their grocery bill isn't climbing every month, that could shift. Luna: You know what else I think matters? The fact that grocery inflation is now below overall inflation. That's the reverse of the 2021-2023 period, when food was running way ahead. It changes the narrative. Lucas: It does. And it changes the math for low-income households, who spend a much larger share of their income on food. For them, this isn't academic. If you're in the bottom quintile, you spend about 30 percent of your after-tax income on food. A 1.8 percent increase versus a 4.2 percent wage increase is genuinely meaningful. Luna: Right. So let's zoom in on that. The wage data we have is an average — it doesn't tell us who got the raise. But the Employment Cost Index, which covers wages and benefits, shows wages are rising across the board, especially in lower-wage sectors like leisure and hospitality. Lucas: Yeah, the ECI for wages was up 4.5 percent in the first quarter. And the strongest gains are still in the bottom quartile. That's partly minimum wage increases in states like California and New York, but also labor market tightness forcing employers to compete. Luna: So the combination of strong wage growth at the bottom and cooling grocery prices is probably the best news we've had for the working class in this recovery. Lucas: I'd agree with that. Now, I don't want to overstate it — energy prices are still a wildcard. The wholesale price index for May showed a big jump in energy, up 1.1 percent month-over-month, and that's partly due to the Iran situation and the ECB hiking rates. But food is stable. And food is the thing people buy every single week. Luna: So if you're a listener, what should you actually expect in the coming months? Is this trend durable? Lucas: The 10-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, is at 2.31 percent. That's actually down slightly from last month. So bond markets think inflation is settling. For groceries, the big risk is weather — droughts, floods — or another supply shock. But barring that, the trend looks good. Luna: And one more thing: the Producer Price Index for May came in hot, but that was almost entirely energy. Processed foods and feeds were actually flat. So even at the wholesale level, food costs aren't pushing up. Lucas: That's a really good point. So the pipeline isn't signaling grocery price hikes ahead. That's the kind of data that gives me some confidence that this isn't just a one-month blip. Luna: I want to step back for a second. We've been talking about this shift in real terms, and I think it's worth noting that this is exactly the kind of economic development that makes the show worth doing. When you see the numbers line up in a way that actually helps people, it's satisfying. Lucas: Totally. And if walking through the economy with us has made something click for you — maybe you've changed how you think about your raise or your budget — honestly, if today was worth a coffee to you, that's the link. Buy me a coffee dot com slash fexingo. It's how we keep this ad-free and focused on what matters. Luna: Yeah, it's a small thing that makes a big difference for us. Appreciate everyone who's ever dropped a coffee. Lucas: Alright, back to the numbers. So where do we go from here? I think the key thing to watch is whether core services inflation — especially rent and medical care — starts to moderate. If that happens, and food stays cool, then wage growth will really start to feel like a raise. Luna: And we should also watch the labor market. The small-cap rally we've seen — the Russell 2000 is up 3.1 percent in the last five days — that's partly a bet on domestic demand holding up. If workers have more purchasing power, that supports earnings for smaller companies. Lucas: Good connection. The Russell being up while the NASDAQ is slightly down tells you something about where investors think the growth is coming from. It's not tech megacaps this month — it's the consumer economy. And that consumer economy runs on people having enough left over after groceries. Luna: So the bottom line: your raise is finally beating grocery prices. It took a while, but the numbers are there. Lucas: Exactly. And if you're wondering whether that matters — just watch the checkout line. That's where the real economy meets the data.