Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Feels Like a Lateral Move in This Economy
Transcript
- Lucas: So you get a raise — let's say four percent, which is roughly where average hourly earnings are right now. The number on your paycheck goes up. And yet, consumer sentiment just hit an all-time low in May. That's not a contradiction — that's the puzzle we're going to look at today. Luna: It's almost like the raise doesn't register. Or it registers, but it doesn't feel like progress. Lucas: Exactly. And the data backs that feeling up in a weird way. Average hourly earnings for private workers came in at $37.40 in April, up from $37.35 the month before. Over the past year, that's about a four percent nominal increase. Luna: Meanwhile the CPI is at 332.4 in April, up from 330.3 in March. So prices are also up about three percent year-over-year if you look at headline CPI. That means real wage growth is positive, but just barely. Lucas: Right. Real earnings are up maybe one percent. That's not nothing, but it's not the kind of muscle you feel when you see a four percent bump on your pay stub. And I think that gap — between the nominal number and the felt reality — is where the psychology kicks in. Luna: I've been reading about 'money illusion' — the tendency to think in nominal terms rather than real terms. If your salary goes from $60,000 to $62,400, that feels like a win. But if everything you buy went up three percent, you're actually just treading water. Lucas: And the thing is, we know inflation has been sticky. Core CPI ex food and energy is at 335.4, still elevated. And energy inflation specifically — Fed's Goolsbee was on CNBC yesterday saying it's been more persistent than expected. So the stuff you buy every week — gas, groceries — those prices are still climbing. Luna: That's the stuff people notice. They don't check the CPI every month. They check the price of eggs. Lucas: Exactly. Behavioral economist Richard Thaler talks about 'salience.' The price of eggs is salient. The four percent nominal raise is salient at the moment you get it. But six months later, the raise is baked into your direct deposit and the higher egg price is still there every time you swipe your card. Luna: So the raise fades from memory, but the higher prices don't. Lucas: And that's where we get this weird disconnect. The labor market is in decent shape — Kashkari said that yesterday. Employment cost index for wages is at 177.5, up from 176.2. Wages are growing. But consumer sentiment is cratering because the reference point has shifted. Luna: Reference point — that's a Kahneman and Tversky concept, right? You judge your situation relative to what you had before, or what you expected. Lucas: Right. So if you got used to two percent inflation and three percent raises, you felt like you were gaining a point of real income each year. Now you're getting four percent raises but inflation is at three or three and a half. You're still gaining, but less than before. And that loss of momentum registers as a loss, even though you're not losing ground. Luna: It's like running on a treadmill that got faster. You're still running, but you're more tired and you're not moving forward as fast. Lucas: Exactly. And that feeling is real. It's just not captured in the year-over-year change in real wages. Because real wages are a snapshot — they don't capture the trajectory you expected. Luna: And there's also the social comparison. If your neighbor got a five percent raise and you got four, you feel worse even if both of you are beating inflation. Lucas: That's a huge part of it. The data shows median usual weekly earnings at $1,204 as of early 2025, up from $1,159. That's about a four percent increase. But if you're in an industry that's lagging — say retail or hospitality — you might be seeing two or three percent, and you're watching tech workers get seven or eight. The gap feels unfair. Luna: So the raise itself is real, but the feeling of 'lateral move' comes from a combination of money illusion, shifting reference points, and social comparison. Lucas: And one more thing — the breakeven inflation rate, which is the market's expectation for inflation over the next ten years, is at 2.39 percent. That's down a tick from 2.40. So the bond market thinks inflation will moderate. But that doesn't help you today when you're filling up your tank. Luna: You know, listening to this, I realize how easy it is for policymakers to say 'real wages are up' and miss the emotional toll. People aren't irrational. They're responding to the information that's most vivid to them. Lucas: And that's where we come in. We try to bridge that gap — connect the data to the experience. And we do it without any ads or sponsors, because we think that keeps the conversation honest. Luna: Yeah, it's a deliberate choice. If walking through the economy with us has made something click — maybe you could support that choice. It's buy me a coffee dot com slash fexingo. Lucas: No pressure. Just if it's useful to you. And speaking of useful — let's get back to that raise that feels like a lateral move. Luna: So if the feeling is real, what can workers actually do? I mean, is there a way to break the money illusion? Lucas: One strategy is to link your raise to a specific financial goal. Instead of thinking 'I got a four percent raise,' think 'I now have an extra $50 a week to put into my emergency fund.' That turns the nominal number into a real action. Luna: That's a good reframe. Also, I think paying attention to real wage data — like what we're talking about — helps. If you know that inflation is three percent, a three percent raise isn't a raise. It's a cost of living adjustment. Lucas: And that's honestly what a lot of raises are right now. Companies are giving out COLAs to retain workers, not because productivity is soaring. The employment cost index shows total compensation is up, but a big chunk is just keeping pace with prices. Luna: So the question becomes: how do you get a raise that actually moves you forward? That probably means switching jobs or getting a promotion, not just the annual adjustment. Lucas: That's the classic finding. Job switchers tend to see bigger nominal increases than job stayers. In this environment, that gap might be even wider because companies are hesitant to give big raises to existing employees when inflation is uncertain. Luna: But switching jobs has its own costs — risk, learning curve, lost tenure. Not everyone can do that. Lucas: Totally. And that's another reason the aggregate data can feel disconnected. If you're not in a position to switch, your raise might be three percent while the average is four. You're being dragged down by the people who can't move, even though the average looks fine. Luna: So the 'lateral move' feeling might actually be rational for a large chunk of workers. Lucas: I think that's the key takeaway. The data isn't wrong — real wages are up. But the distribution of those gains is uneven. And the psychological framing — money illusion, reference points — amplifies the dissatisfaction. Luna: So next time you get a raise, maybe don't just look at the percentage. Look at what it buys you compared to last year. And if it's not much, you're not alone. Lucas: And that's the thing about this moment. Consumer sentiment hit a record low, but we're not in a recession. The labor market is decent. So the frustration is real, but it's a frustration of expectations, not of collapse. That makes it harder to fix, because you can't just cut rates or print money to make people feel better. Luna: Maybe the fix is just understanding it. Recognizing that your raise is a lateral move isn't defeat — it's clarity.