Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Invisible Tax of Corporate Pricing Power
Transcript
- Lucas: Look at the numbers for September again. The Core CPI is sitting at 338.9, which is barely moving quarter-over-quarter, and yet if you walk into a grocery store or look at your auto insurance renewal, it feels like prices are accelerating. The disconnect isn't in the data; it's in the mechanism. We used to think inflation was a fuel-cost problem, but today it's a pricing-power problem. Luna: Right, and that's the scary part because it means businesses have decided they can raise prices regardless of demand. It's not supply chain chaos anymore; it's a strategic choice to protect margins. Lucas: Exactly. And you can see it in the Employment Cost Index, which ticked up to 179.0 for the second quarter. Wages are creeping higher, sure, but companies aren't absorbing those labor costs by cutting profits. They're passing them on through what economists call 'sticky' pricing. You notice this most in services where there's no physical inventory to liquidate. Luna: So you're saying the real story isn't that goods are expensive, but that the services around those goods are getting pricier? Like maintenance, insurance, or healthcare? Lucas: Precisely. Let's talk about insurance premiums, which has been a recurring theme in our recent episodes. With the PCE price index holding at 131.6, the underlying pressure is persistent. But here's the twist: many insurers are now reducing coverage limits or raising deductibles rather than just raising the sticker price. It's a hidden tax on your purchasing power that doesn't show up immediately in the CPI basket until you actually file a claim. Luna: That makes total sense. If I'm paying more for less protection, my effective cost of living goes up even if the premium itself stays flat. It's a degradation of value, not just a price hike. Lucas: It's a degradation of value. And this is happening across sectors. Look at the broader market reaction today. The Dow is up 1.7 percent, driven largely by financials and industrials, while tech is down a bit. Investors are rewarding companies that have demonstrated the ability to maintain double-digit margin growth despite weak consumer volume. It's a vote of confidence in their pricing discipline. Luna: But is that discipline sustainable when household budgets are already stretched? The median usual weekly earnings are up to 1,204 dollars, but that doesn't mean people have more disposable income if their fixed costs are eating everything. Lucas: That's the crux of it. Your paycheck is growing, yes, but your fixed liabilities—rent, insurance, utilities—are growing faster. In October 2026, we're seeing a divergence where asset owners feel richer because their equity portfolios are performing well, while wage earners feel poorer because their cash flow is being squeezed by these sticky service costs. Luna: So the wealth gap isn't just about who owns stocks; it's about who has the flexibility to absorb these price shocks. If you're living paycheck to paycheck, any increase in service costs is immediate pain. Lucas: Immediate pain. And businesses know this. They've realized that high-income consumers are less price-sensitive, so they optimize their products for that segment. You get better features for the wealthy, but the baseline tier gets stripped down. It's called versioning, and it's everywhere now. From software subscriptions to cable packages to even basic groceries. Luna: I noticed that with streaming services. They're not just raising prices; they're cracking down on password sharing and bundling ads into tiers that were previously ad-free. It feels like a deliberate erosion of the original deal. Lucas: It is erosion. And it's efficient for the company. They extract more revenue from the same user base without acquiring new customers. This is why revenue growth can be strong even when customer acquisition stalls. It's all about wallet share per existing user. In the current macro environment, with the budget deficit swelling toward two trillion dollars, the government isn't helping to subsidize these costs, so the burden falls entirely on the consumer. Luna: Which brings us back to the Fed. If inflation is sticky in services, does that mean interest rates stay higher for longer? Because that just adds another layer of cost to mortgages and credit cards. Lucas: It absolutely does. The ten-year breakeven inflation rate is flat at 2.35 percent, which suggests markets aren't panicking about long-term inflation. But the FOMC is watching core services closely. If wages continue to rise as seen in the Employment Cost Index, and companies keep passing those costs on, the Fed has to keep tightening to cool demand. It's a feedback loop. Luna: So we're stuck in this stalemate where wages go up, prices go up, and rates stay high. Who wins in this scenario? Is anyone actually coming out ahead? Lucas: The companies with strong balance sheets and pricing power win. Think of large-cap conglomerates that can buy back stock while raising prices. They're using their cash reserves to insulate themselves from volatility. Meanwhile, smaller businesses without that luxury are forced to either cut corners or exit the market. It's consolidating the economy into fewer, larger players. Luna: That sounds like a recipe for less competition over time. If there are fewer competitors, those big players have even more freedom to raise prices without losing customers. Lucas: Exactly. It's a monopoly effect driven by operational efficiency. Smaller firms can't afford the technology stack or the legal teams to manage complex pricing algorithms. So the big guys win, and they pass the savings—or rather, the retained earnings—to shareholders. It explains why the S&P 500 is near 7,713 despite consumer sentiment being so low. Luna: It's bizarre that the stock market and the street feel like two different worlds. One is celebrating record profits, the other is complaining about the price of milk. Lucas: They are different worlds. The market is forward-looking and focused on margins. The street is backward-looking and focused on receipts. And right now, those two realities are colliding. Housing is flashing warning signs, as CNBC reported this week, because mortgage rates haven't come down enough to unlock supply, but prices haven't dropped enough to encourage sales. It's a frozen middle. Luna: So homebuyers are trapped too. They can't sell because they won't get the price they want, and they can't buy because the payments are too high. It's another form of that sticky pricing we're talking about. Lucas: Another form. And it reinforces the idea that assets are holding value while cash is losing it. If you own a home, you're insulated. If you rent, you're exposed. That's the new divide. It's not just about income level; it's about asset ownership. Luna: Which makes saving for a down payment even harder if your rent is going up every year. You're fighting against the very thing you're trying to buy into. Lucas: You're fighting gravity. And the interesting thing is, this pricing behavior isn't going away. Companies have learned that consumers will pay more if the alternative is uncertainty. So they're selling stability, even if it's expensive. It's a psychological play as much as an economic one. Luna: Stability is a premium product. I guess that's why we see these 'gold-tier' memberships everywhere now. People are willing to pay extra to avoid the risk of running out of stock or dealing with poor service. Lucas: Precisely. And that's where the future of business lies. Not in cheap goods, but in guaranteed access. It's a shift from volume to value. For investors, that means looking for companies that offer subscription-like stability rather than one-off transactions. For workers, it means realizing that wage growth alone might not be enough if the cost of stability keeps rising. Luna: So the advice isn't just 'ask for a raise,' it's 'find a job that offers benefits that protect you from these specific price shocks.' Like health insurance that doesn't have a deductible cliff. Lucas: Or a pension that doesn't depend on the stock market. It's about structuring your life to minimize exposure to volatile service costs. It's defensive economics. You're trying to build a moat around your purchasing power. Luna: A moat. I like that. It turns the conversation from victimhood to strategy. Instead of asking why things are so expensive, you ask how to structure your finances so those expenses don't crush you. Lucas: Exactly. And that mindset shift is crucial. The market rewards those who anticipate these shifts. If you see pricing power concentrating in certain sectors, you invest accordingly. If you see service costs rising, you negotiate your employment package accordingly. It's proactive, not reactive. Luna: And it requires staying informed. Which is exactly why we keep doing these deep dives. You can't navigate this terrain if you're only looking at headlines. Lucas: We do it because the details matter. A percentage point difference in inflation can change a Fed decision. A small change in insurance deductibles can change your family's budget. These aren't abstract numbers; they're the building blocks of your daily life. Luna: Absolutely. And if walking through the economy with us has made something click, remember that we deliberately don't run ads on these shows. If you want to support that choice, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: It keeps the content independent and focused on what matters. Thanks for supporting us. Now, let's look at one final piece of the puzzle: the global impact. How does India's finance minister comment on market liquidity affect US exporters? Luna: Good question. If emerging markets have easy liquidity, they might import more US goods, which could help offset some domestic softness. It's a tiny tailwind, but in this environment, every little bit helps. Lucas: Tiny tailwinds add up. But ultimately, the domestic pricing power dynamic is the main driver. As we head into Q4, watch how companies handle their holiday guidance. Are they expecting volume growth, or just price increases? That tells you everything you need to know about the consumer's resilience. Luna: Price increases vs. volume growth. That's the litmus test. If volumes drop but revenues hold, we're in a pure pricing-power environment. It's a fragile state, but it's where we are. Lucas: It's a fragile state. And as we close out October 2026, the question isn't whether prices will fall, but whether wages can catch up fast enough to make the gap irrelevant. Until then, we're navigating by the stars of margin reports and core CPI prints. Luna: Navigating by the stars. I'll take that over guessing the lottery numbers any day. Stay sharp, everyone.