Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How the Iran War Sent Consumer Sentiment to a Record Low
Transcript
- Lucas: Consumer sentiment hit a fresh record low last week. This is the University of Michigan survey, May reading — and it's the lowest we've ever seen. And this is happening in a labor market where wages are finally, actually outpacing inflation for many workers. Luna: Right, we covered that in episode ten — real wage growth turning positive. So why does everyone feel so terrible? Lucas: That's the paradox we're going to unpack today. The headline from last Friday: 'Consumer sentiment hits fresh record low in May as Iran war fuels inflation worries.' The Iran conflict is the big new variable here. It's rattling energy markets, reviving fears of a sustained inflation spike. Luna: Gas prices specifically. That's what hits people directly, every week at the pump. It's visceral. Lucas: Exactly. And the sentiment survey captures that emotional response — it's not a rational forecast. So even if your paycheck is up three percent year-over-year, if you're paying fifty cents more per gallon, the feeling is that you're losing ground. Luna: Let's look at the actual numbers. The sentiment index — do we have the precise figure? Lucas: The University of Michigan's preliminary May reading came in at 67.4. That's down from 77.2 in April. A ten-point drop in one month. For context, the previous low was during the pandemic, around 71. So we've blown past that. And the war escalation in Iran — that's the clear trigger. The survey's field period overlapped with the first strikes. Luna: So it's a shock, not a slow decline. That makes sense. But the economic fundamentals are actually decent — the S&P 500 at 7,473, the Dow above 50,000. Small caps, the Russell, up over three percent in the last five days. Lucas: Right, markets are actually rallying. There's this huge disconnect between how investors feel and how consumers feel. Investors are looking at potential Fed rate cuts if the economy softens. Consumers are looking at the price of eggs and gasoline. Luna: And the ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — it's at 2.40 percent. That's up from 2.39 the week before. Small move, but in the wrong direction if you're hoping inflation is tamed. Lucas: It's sticky. Core PCE, the Fed's preferred measure, is still running above two percent. The April CPI was 332.4, up from 330.29 in March. That's about a 2.9 percent annualized rate. Core CPI even higher. So wage growth is catching up, but it's fragile. Luna: And one geopolitical shock can wipe out the gains. That's what the sentiment data is telling us. Lucas: Let's talk about what this means for the Fed. They're in a tough spot. If consumer sentiment is cratering, spending could follow. Consumer spending is two-thirds of GDP. But if they cut rates too soon, and inflation re-accelerates because of energy costs, they lose credibility. Luna: The market is pricing in a cut later this year. But the Fed has been data-dependent, and this sentiment data is noisy. It's not like a jobs report or CPI release. Lucas: Right, the sentiment surveys are vibes-based. But vibes matter. If people feel poor, they act poor — they pull back on discretionary spending, they save more, they demand higher wages. That can become self-fulfilling. Luna: There's also a political dimension. Record-low sentiment in an election year — that's going to shape policy debates, maybe even fiscal responses. We've already seen talk of gas tax holidays or energy subsidies. Lucas: Speaking of which — it's worth noting that the sentiment survey specifically asks about personal finances and buying conditions for durables. The current conditions index fell to 68.8 from 88.5. That's huge. People are saying 'now is not a good time to buy a car or a refrigerator.' Luna: And that's where the wage story gets complicated. Average hourly earnings for private workers — the latest reading from April was $37.40, up from $37.35. That's a five-cent increase. Not nothing, but not enough to offset a spike in energy costs. Lucas: The employment cost index for wages, which is a broader measure, was at 177.5 in Q1, up from 176.23. That's about 0.7 percent quarterly growth. Annualized, that's close to three percent. So compensation is rising. But if inflation expectations unanchor — if people start to expect four or five percent inflation — then those wage gains get priced in and we're back in a spiral. Luna: Speaking of the show — if walking through the economy with us has made something click, or if you just find value in having this data unpacked without ads, there's a way to support us directly. Lucas: Yeah, listener support is what keeps this show ad-free and independent. If you're able and willing, you can head to buy me a coffee dot com slash fexingo. No pressure, ever — we're grateful you listen either way. Luna: Exactly. It's a small way to help us keep digging into these numbers. Now, back to the paradox — Lucas, you mentioned the risk of an inflation spiral. How real is that risk right now, given the Iran situation? Lucas: It's real, but not imminent. The ten-year breakeven is 2.40. That's above the Fed's two percent target, but it's not screaming 1970s. The risk is if oil prices stay elevated for months. Right now, Brent is around $85. If it goes to $100 and stays there, then you have a broad-based input cost shock. Luna: And that would hit wages indirectly too. Companies with thin margins — restaurants, retail — they'd have to raise prices or cut hours. Workers would feel it. Lucas: Exactly. So the sentiment record low is a warning light. It's not the economy itself breaking, but it's consumers signaling they're on edge. And when consumers are on edge, the economy can break. Luna: Is there any historical parallel? Have we seen sentiment this low while wages were growing? Lucas: The closest might be the early 1980s, when Paul Volcker was crushing inflation with high rates. Sentiment was terrible, unemployment was high, but real wages eventually stabilized. The difference now is that the labor market is strong — unemployment is low, job openings are plentiful. So it's a weird hybrid: bad vibes, good fundamentals. Luna: That's the phrase — 'bad vibes, good fundamentals.' And the question is which one wins. Lucas: Right. If the Iran conflict de-escalates, sentiment could bounce back quickly. If it drags on, the fundamentals could deteriorate. The Fed is watching this closely. The next FOMC meeting is in June. I expect they'll hold rates steady but acknowledge the downside risks. Luna: One last thing — the small-cap rally. The Russell is up 3.4 percent in five days. That suggests investors think smaller, domestically focused companies are less exposed to the geopolitical shock. Maybe that's a signal about where the economy is actually headed. Lucas: It could be. Small caps are more sensitive to domestic demand and interest rates. If the market thinks the Fed will cut, small caps benefit. But if consumer sentiment stays weak, those same companies will face a demand problem. So there's a tension there. Luna: So the bottom line: wages are up, but sentiment is down because of the war and energy prices. The next few months will tell us whether the vibes catch up to the data or the data catches up to the vibes. Lucas: That's the right framing. And we'll keep tracking it. Thanks for listening.