US Labor Costs Rise by Most in Year in Sign of Wage Pressures
(Bloomberg) -- A broad gauge of US labor costs closely watched by the Federal Reserve accelerated in the first quarter by more than forecast, illustrating persistent wage pressures that are keeping inflation elevated.
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The employment cost index, which measures wages and benefits, increased 1.2%, the most in a year, after rising 0.9% at the end of 2023, according to Bureau of Labor Statistics figures out Tuesday. The advance exceeded all projections in a Bloomberg survey of economists.
Stock-index futures fell, Treasury yields rose and the dollar strengthened after the figures.
The labor cost figures, following a host of recent reports indicating stubborn price pressures, risk adding to concerns about Fed policymakers’ progress in getting inflation back down to their goal. Officials are expected to keep interest rates unchanged at a two-decade high at the conclusion of their policy meeting Wednesday, and they’re unlikely to lower them anytime soon.
“This is a challenging print for the Fed,” Robert Sockin, senior global economist at Citigroup Inc., said on Bloomberg Television. “Coming in at 1.2 is just evidence that the inflation data, the wage growth data, is moving in the wrong direction to be consistent with their target.”
The first-quarter increase in employment costs was broad and included notable advances in public administration, hospitals and manufacturing.
Compared with a year earlier, the ECI climbed 4.2% after a similar annual increase in the fourth quarter.
Though there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists tend to favor the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries. It’s also the Fed’s preferred wage measure.
Wages and salaries for civilian workers increased 1.1% for a third straight quarter, and were up 4.4% from a year ago. The advance included the effects from minimum-wage increases in about half of US states at the start year.
What Bloomberg Economics Says...
“Landing just as FOMC members start their two-day policy meeting, the Employment Cost Index will further erode their confidence that inflation is declining toward the 2% target — setting the stage for a relatively hawkish stance in the May 1 decision and news conference.”
— Estelle Ou, economist
For the full note, click here
Adjusted for inflation, private-industry compensation rose 0.6% from a year ago, while wages increased 0.8%. The strength of the jobs market, including positive real earnings growth, has been key to sustaining consumer demand. Data out last week showed that while the economy lost some momentum in the first quarter, consumer spending remained resilient.
Wages for service workers in the private sector rose 1.2% from the prior quarter, unadjusted for inflation. Since compensation is a major cost for employers in this sector, Fed officials monitor it closely through a subset of inflation known as core services excluding housing. Worker pay in goods-producing industries also rose 1.2%, the most in a year.
Still, an influx of immigrants, women and older workers has helped boost the supply of workers at a time when demand for labor is still healthy.
Other measures of pay gains are pointing to softer growth. The Atlanta Fed’s wage growth tracker, which is a three-month moving average of median pay, has largely cooled since peaking in 2022. And the government jobs report out Friday is forecast to show average hourly earnings stepped down in April from the year before.
--With assistance from Chris Middleton.
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