Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Wage Growth Is Real But Your Rent Is Eating It
Transcript
- Lucas: So the April jobs report came out a couple weeks ago, and everyone focused on the headline payroll number and the unemployment rate holding at 3.9%. Totally fine. But I want to talk about the part that actually shows up in people's bank accounts: average hourly earnings hit $37.40 an hour. Luna: That's up from $37.35 the month before, right? So basically a nickel. Feels microscopic. Lucas: It does, and month-over-month it's only about a tenth of a percent. But year-over-year, it's up 4.7%. Compare that to the CPI we got on May 15th, which showed inflation running at 3.4% year-over-year. On the surface, wages are outpacing prices by 1.3 percentage points. Luna: That sounds like a win for workers. So why does it not feel that way? I think my rent went up 8% this year. Lucas: That's the rub. The headline CPI number — 332.4 for April — is pulled down by goods prices. New and used cars have actually been declining. Energy is down year-over-year. But shelter, which is about a third of the CPI basket, is still running at 5.2% annualized. Luna: So the average worker's wage increase gets eaten by housing before they even get to food and gas. Lucas: Exactly. And there's a further twist. Core CPI — which strips out food and energy — came in at 335.4. That's up from 334.17 in March. So the underlying trend is actually reaccelerating. That's the number that the Fed is really watching. Luna: And speaking of the Fed, Kevin Warsh gets sworn in as chair on Friday. This is literally his first week with the hot seat. What does he inherit? Lucas: He inherits a situation where markets are now pricing in a higher probability of a rate hike in July. You had Ed Yardeni on Monday saying the Fed will have to raise rates to appease bond vigilantes. The ten-year breakeven inflation rate is at 2.44%, down slightly from 2.49%, but still well above the Fed's 2% target. Luna: So Warsh walks in and the bond market is basically telling him, 'You need to tighten more or we'll do it for you.' That's a tough first week. Lucas: It's a tough first week, but here's the thing — raising rates would cool the economy and potentially slow wage growth. The median usual weekly earnings data from 2025 showed a jump to $1,204 from $1,159, which is about 3.9% growth. But if you factor in the shelter component of CPI, real purchasing power for renters is probably flat or negative. Luna: Let's talk about that real wage number. The Bureau of Labor Statistics publishes real average hourly earnings, which adjusts nominal wages for inflation. Do you have that figure? Lucas: I do. For April 2026, real average hourly earnings for all private employees were essentially unchanged from a year ago. Up maybe 0.1%. So that headline 4.7% wage gain? Once you adjust for the actual basket of goods people buy, it's a rounding error. Luna: That's the number that matters — flat. So the narrative that wages are beating inflation is technically true for the CPI as a whole, but it's misleading for anyone who rents or buys services. Lucas: Right, and services inflation is sticky. The employment cost index for wages — that's a broader measure including benefits — was at 177.5 in the first quarter, up from 176.23. So labor costs are still rising, which feeds into services prices, which then feeds back into CPI. Luna: That's the wage-price spiral that everyone worried about two years ago. Are we actually seeing it now, just at a lower level? Lucas: I think we're seeing a slow-motion version of it. Wages go up, but then rent goes up because landlords know tenants have more money. And then workers demand higher wages because rent is eating their paycheck. It's not a spiral — it's more of a slow grind. Luna: And the Fed's new chair has to decide whether to interrupt that grind with higher rates, which would risk hurting the labor market, or let it play out and hope inflation settles down on its own. Lucas: Exactly. And the bond market is not giving him the luxury of time. The five-day performance on the major indices shows some stress — the S&P 500 down 0.9% over five days, the NASDAQ down 1.4%, the Russell 2000 down 1.6%. Small caps getting hit hardest, which is usually a signal that the market expects tighter policy. Luna: So workers are seeing flat real wages, rent is still climbing, and the new Fed chair might hike rates in July. What's the one thing our listeners should take away from this episode? Lucas: I'd say this: don't just look at the wage number. Look at the wage number relative to the inflation that applies to you. If you're a homeowner with a fixed mortgage, you're probably doing fine. If you're a renter in a major city, your purchasing power has likely declined over the past year despite that 4.7% raise. Luna: And that's the disconnect that keeps showing up in consumer sentiment polls — people feel bad even when the data looks okay on the surface. Lucas: Exactly. The PCE price index, which is the Fed's preferred measure, came in at 130.3 for March, up from 129.48. Core PCE at 129.3. Those are still above target. The 10-year breakeven at 2.44% tells you the market doesn't believe inflation is going back to 2% anytime soon. Luna: Alright, so we're watching the May CPI on June 11th, and then the FOMC meeting June 17-18. That's going to set the tone for Warsh's tenure. Lucas: And in the meantime, if you're negotiating a raise, don't just cite the headline CPI. Bring the shelter index. Bring your own rent increase. That's the number that actually matters for your wallet. Luna: Good advice. Thanks Lucas. Lucas: Thanks Luna. We'll keep tracking this.