Business Standard

US labour costs pick up, likely locking in one more Fed rate hike

The employment cost index, a broad gauge of wages and benefits, increased 1.2% in the first quarter, according to Labor Department figures released Friday

Bloomberg Photo

Bloomberg Photo


Listen to This Article

By Augusta Saraiva

US employment costs accelerated by more than forecast at the start of the year, underscoring persistent inflationary pressures that will keep the Federal Reserve on track for another interest-rate hike next week.
The employment cost index, a broad gauge of wages and benefits, increased 1.2% in the first quarter, according to Labor Department figures released Friday. It was the first quarterly acceleration in a year, led by a pickup in benefits.


The median estimate in a Bloomberg survey of economists called for a 1.1% advance. Labor costs have risen at least 1% for seven straight quarters, extending what was already a record streak in data back to 1996.

The figures show that compensation is still rising fast in a persistently tight labor market. That said, job openings are coming down and layoffs are swirling as more people are looking for work, which could limit further pay gains.

Fed officials will need to see signs of a sustained deceleration before they declare victory in the war on price pressures. The data still keep them on course to raise interest rates by a quarter point next week, before what’s expected to be a long pause.

“If any Fed officials were wavering on a May rate hike, I suspect the underlying strength in today’s ECI will likely push them to support at least one more hike,” Omair Sharif, president of Inflation Insights LLC, said in a note.

That was further reinforced by a separate report Friday, which showed the Fed’s preferred inflation gauge rose at a brisk pace last month. US stock futures remained lower and the yield on the two-year Treasury note was little changed after the releases.

Services Slow
The advance in compensation gains last quarter was mainly due to goods-producing industries like construction. Labor costs at service providers rose 1.1%, the least in five quarters.

That’s important for the Fed, which has been particularly concerned with inflation in service industries. The personal consumption expenditures report showed a closely watched measure of services price growth excluding energy and housing advanced at the slowest pace in eight months, according to data compiled by Bloomberg.

Unlike the earnings measures in the monthly jobs report — which is due next Friday — the ECI is not distorted by employment shifts among occupations or industries.

Compared with a year earlier, the labor costs measure rose 4.8%, down from 5.1% at the end of last year. Excluding incentive-paid occupations — a measure the Fed tracks closely — employment costs also advanced at a slower pace.

Labor costs have generally been receding from record highs as turnover eases and several employers slow hiring or dismiss staff. Average hourly earnings rose 4.2% last month on an annual basis, down from a peak of 5.9% in March 2022.

Other measures, like the Atlanta Fed’s wage growth tracker, have regained steam. And as overall inflation cools, that’s amplifying purchasing power for many workers.

Wages, Prices
Such a dynamic may not be as well-received at the Fed, however, as Chair Jerome Powell has repeatedly pointed to strong wage growth as one of the reasons why prices have remained elevated. But other policymakers are skeptical. They agree that wage growth and price growth are tied together; it’s just a question of which leads the other.

Read more: Powell Faces Pushback Inside Fed Over Need to Cool Wage Gains

Wages and salaries for civilian workers rose 1.2% in the first three months of 2023 — unchanged from the fourth quarter — while benefits picked up, the ECI report showed. Pay at state and local governments was also unchanged.

The ECI is the last report on wages that the Fed will see before the conclusion of its two-day meeting on May 3. Officials will also receive the latest figures on job vacancies, as well as manufacturing and service activity, by then.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Apr 28 2023 | 9:29 PM IST

Explore News