Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How the Wage-Price Spiral Actually Works Today
Transcript
- Lucas: Luna, I want to talk about the wage-price spiral — that classic economic feedback loop where rising wages push up prices, which then push up wages again. It's been a concern since 2021, but the actual data we're seeing in May 2026 tells a more nuanced story. Luna: Well, the headlines this week certainly paint a grim picture. Consumer sentiment hit a fresh record low on Friday, partly because of Iran war fears, but also because prices just keep climbing. CPI hit 332.4 in April. Lucas: Right, and yet average hourly earnings are now at $37.40 — up from $37.35 the month before. That's real wage growth, technically. But the core CPI is at 335.4, so the gap isn't closing fast enough for most households. Luna: So why aren't we seeing the classic spiral? In theory, higher wages should mean more spending, which pushes prices up further, which leads to demands for even higher wages. Lucas: Exactly. And the fact that we're not seeing that vicious cycle is actually really interesting. A lot of it comes down to productivity and profit margins acting as shock absorbers. If you look at unit labor costs — that's wages adjusted for productivity — they've been rising, but not as fast as headline wage numbers suggest. Luna: So companies are absorbing some of the wage increase through efficiency gains rather than passing it all on to consumers? Lucas: Precisely. The Employment Cost Index for wages hit 177.5 in Q1, up from 176.23. That's a solid increase. But at the same time, we've seen companies invest heavily in automation and process improvements. The AI economy story we did in episode one touches on this — blue-collar workers are seeing their value rise, but they're also being paired with more technology. Luna: And there's a sectoral split here too, right? I'm thinking of retail versus manufacturing. In retail, margins are thin, so any wage increase tends to hit prices more directly. In manufacturing, there's more room to automate. Lucas: That's a great point. The Federal Reserve has actually published some research on this — they found that in industries with high market concentration, firms have been able to maintain or even expand margins despite higher wages. But in more competitive sectors, margins are getting squeezed, and prices are rising faster. Luna: Right. So the spiral is happening in patches, not everywhere. And that might explain why consumer sentiment is so low — because the patches where it's happening are the ones people feel most, like groceries and rent. Lucas: Hmm. And if today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Keeps us independent and digging into the data. Luna: Honestly, we love doing this, and knowing it helps people makes it worth it. So yeah, if you're finding value, that's the way to keep it going. Lucas: Alright. Back to the wage-price dynamic. So another factor that's really important is the ten-year breakeven inflation rate — it's at 2.40 percent as of yesterday, up just slightly from 2.39. That suggests markets expect inflation to stay above the Fed's target but not spiral out of control. Luna: That's a pretty calm signal, given all the geopolitical noise. But the core PCE — which the Fed watches most closely — was at 129.3 in March, up from 128.9. Still climbing, but slowly. Lucas: Right. And that's consistent with what we're seeing in wage data: gradual increases, not a breakout. The median usual weekly earnings are now $1,204, up from $1,159 a year ago. That's about a 3.9 percent increase year-over-year. Meanwhile, overall CPI is running around 3.2 percent year-over-year. Luna: So on paper, wages are outpacing inflation by a bit. But in practice, people don't feel it because the things they buy most — food, energy, rent — have risen much faster than the average. Lucas: Exactly. The CNBC headline from yesterday says it all: 'Americans are feeling inflation's pinch into the holiday weekend.' And that pinch is concentrated in categories like groceries, which are up, and gas, which is volatile because of the Iran situation. Luna: So the 'spiral' might be more of a slow grind. Workers get a raise, but then their rent goes up, and their grocery bill goes up, and the raise feels like it's gone before it even arrives. Lucas: Yeah. And that's why the Fed is in such a tough spot. If they cut rates to stimulate the economy, they risk reigniting inflation. If they hold steady or hike, they risk crushing the labor market. The Fed funds futures are pricing in a cut later this year, but it's far from certain. Luna: And the consumer sentiment data from last week — a record low — suggests households are already feeling the strain. So there's real pressure on the Fed to do something. Lucas: But here's the thing: if you look at the stock market, it's been rallying. The S&P 500 hit 7,473, up one percent in the last five days. The Dow is at 50,580, up 1.8 percent. That's not a market that's pricing in a recession. Luna: So there's a disconnect. Wall Street is looking at corporate profits and productivity gains, while Main Street is looking at their paycheck and their rent. Lucas: Exactly. And that brings us to the key question: will the wage-price spiral actually materialize, or is it already being contained by structural changes in the economy? I think the evidence so far points to containment, but it's fragile. Luna: What would break it? A big jump in energy prices from the Iran situation, for example, could push inflation expectations higher and trigger a wage catch-up spiral. Lucas: Right. The breakeven rate at 2.40 is calm, but if we see a sustained spike in oil prices, that number could move quickly. And once inflation expectations become unanchored, the spiral becomes self-fulfilling. Luna: So the next few months are critical. The data from Q2 will show whether wage growth is accelerating or stabilizing. Lucas: Yeah, the April data we have is just one month. We need to see the trend. But for now, the story is that productivity and margins are acting as buffers, but they're not infinite. If labor costs keep rising, eventually something has to give — either prices go up more, or margins shrink, or both. Luna: And that's the kind of thing that keeps Fed officials up at night. Thanks for breaking it down, Lucas. I feel like I actually understand the wage-price spiral now — not just the theory, but what's happening right now. Lucas: Glad it helped. It's a complicated picture, but the data gives us a solid foundation. We'll keep watching it.