Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping the Job Market You Know
Transcript
- Lucas: Let's start with a number that's been bugging me: the unemployment rate has been sitting at 4.3 percent since February. Flat. No movement. Meanwhile, job openings — the JOLTS number — have been drifting lower, down to 6.866 million in March. Luna: And that's despite the fact that initial jobless claims just dropped to 209,000. So layoffs are low, hiring is slow — the labor market is basically frozen. Lucas: Exactly. And that's the puzzle. In a normal economy, low layoffs and solid payroll growth — nonfarm payrolls hit 158.7 million in April — would mean a tight market, with wages climbing. But average hourly earnings are only up to $37.40. That's barely keeping pace with inflation, let alone getting ahead. Luna: So what's going on? Is this just sticky inflation eating up wage gains, or is there something structural? Lucas: I think it's structural. Look, we've talked about stagflation as high inflation plus slow growth. But the labor market piece is its own animal. The old relationship — the Phillips curve — says when unemployment is low, wages should rise. That's broken. We have low unemployment, but wage growth is tepid, and job openings are shrinking. Luna: Right, the Phillips curve has been flat for years. But in stagflation, it's not just flat — it's perverse. You get both high inflation and a cooling labor market. Lucas: And that's exactly what the data shows. Real GDP growth annualized came in at 2 percent for Q1 2026, up from just 0.5 percent the prior quarter. So growth is positive but weak. Meanwhile, core PCE — the Fed's preferred inflation gauge — is still creeping up, at 129.3 in March. Luna: So the economy is growing, but not enough to create a hot labor market. And yet prices keep rising. That's the stagflation cocktail, with a labor twist. Lucas: Exactly. And I want to focus on one specific symptom: the decline in labor market fluidity. That's the rate at which workers move between jobs, industries, or regions. It's been falling for decades, but stagflation seems to be accelerating it. Luna: Because people are scared to leave a job when inflation is eating their savings and the next move might not pay more? Lucas: Partly. But there's also a mismatch problem. The jobs that are opening — in healthcare, logistics, some ai adjacent fields — require skills that displaced workers from retail or manufacturing don't have. So you have openings and unemployed people coexisting, but they don't match. Luna: That's the classic structural unemployment story. And it's worse in a stagflation because training programs or relocations cost more when everything is expensive. Lucas: Right. And the data backs that up. The quits rate — people voluntarily leaving jobs for better offers — has been trending down. That's a sign workers don't see better options out there. They're staying put. Luna: So the 'Great Resignation' is fully reversed. We're in the 'Big Stay.' Lucas: That's a good way to put it. And it creates a vicious cycle: less movement means less wage pressure from competition, which means workers have less purchasing power, which means consumer sentiment tanks. And boy, did it tank. The latest reading hit a fresh record low in May, partly because of Iran war fears spiking energy prices. Luna: Speaking of which, gold is selling off too — futures at $4,523 but GLD down 1.1 percent in the last five days. Normally stagflation is great for gold, but investors seem to be priced out or looking elsewhere. Lucas: That's a whole other episode. But staying on labor: the real question is whether this is a temporary soft patch or a new normal. I'd argue it's the latter. The combination of high inflation, slow growth, and a rigid labor market is exactly what the 1970s looked like, minus the union power. Luna: But in the '70s, wages did eventually catch up, via cost of living adjustments. We don't have those anymore. That's a key difference. Lucas: And a big reason why this time feels worse for workers. Without COLAs, wage growth lags inflation permanently unless the labor market tightens dramatically. But with job openings falling, that's not happening. Luna: So what's the Fed's move? They're watching core PCE and CPI — CPI hit 332.4 in April, up from 330.29. That's still hot. Do they raise rates again? Lucas: They're stuck. Raise rates, and you risk crushing an already fragile labor market. Cut rates, and inflation reaccelerates. The 10-year breakeven inflation rate is at 2.40 percent, up from 2.39. That's above the Fed's target, so the market doesn't believe they'll win soon. Luna: And the bond vigilantes are already punishing any hint of dovishness. We covered that in episode two. Lucas: Right. So the Fed is probably going to hold steady through the summer and hope the energy shock from the Iran situation fades. But that's a bet, not a plan. Luna: Let me bring this back to a concrete example. I was looking at the nursing home industry. They're desperate for staff — they've had open positions for months — but they can't raise wages enough because Medicaid reimbursement rates are fixed. So they're stuck with unfilled jobs and rising costs. Lucas: That's a perfect microcosm. A job that's available, a worker who might want it, but the wage isn't there because the business model can't support it. That's the mismatch in action. Luna: And those workers are probably staying in lower-paying retail gigs or dropping out of the labor force entirely. The participation rate hasn't budged. Lucas: Exactly. And that's why you see headlines about 'Americans feeling inflation's pinch' — consumer sentiment at a record low — even though unemployment is low. The quality of employment matters, and the data on wage growth tells that story. Luna: So if you're a job seeker right now, what's the strategy? Stay put? Upskill? Move to a different industry? Lucas: If you can, upskill into something with pricing power — healthcare tech, AI operations, logistics management. Those sectors are still hiring. But if you're in a stagnant industry, mobility is tough. The safest bet might be to stay and negotiate hard for whatever COLA you can get. Luna: And for employers? They're going to have to rethink their wage structures or accept chronic vacancies. Lucas: Yeah. The era of cheap labor is over, even if growth is slow. That's the stagflation paradox: you can't afford to pay more, but you can't afford not to. Luna: You know, this kind of analysis — digging into the real mechanics — is exactly why we do this show. And one thing that keeps it going is that a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That literally funds making these deep dives possible. Lucas: It does. No ads, no sponsors, just people who find value in understanding the economy beyond the headlines. And we appreciate that more than we can say. Luna: Alright, back to the grind. So if the labor market is this rigid, what could break it loose? A big enough shock — say, a ceasefire in the Iran conflict that drops energy prices — could change the inflation calculus and give the Fed room to ease. Lucas: That would help. But structural mismatches don't fix themselves overnight. Even if inflation cools, the skill gaps and geographic immobility will persist. We might be looking at years of this 'cold labor market' even as the economy grows slowly. Luna: So the takeaway for today: stagflation isn't just about prices and GDP. It's about a labor market that's lost its fluidity, leaving workers stuck and employers scrambling. And the data — from JOLTS to wage growth to sentiment — all points in the same direction. Lucas: Exactly. The next few quarters will tell us whether this is a new equilibrium or a prelude to something worse. But for now, it's the reality we're living in.