The numbers: The U.S. employment cost index rose more slowly at the end of 2022 for the third quarter in a row, but worker compensation still rose a sharp 1% and didn’t offer much comfort to the Federal Reserve as it fights to tame inflation.
Economists polled by The Wall Street Journal had forecast a 1.1% increase in the ECI in the fourth quarter.
Although trending in the right direction, labor costs are still rising far faster than the Fed would like.
Compensation climbed at a 5.1% clip in the 12 months ended in December — up from 5% in the prior quarter — to leave the increase in worker pay near the highest level in 40 years.
By contrast, wages and benefits rose an average of 2.7% a year from 2017 to 2019.
Read: Workers love big raises. The Fed, not so much. Why pay has a big role in the inflation fight.
Key details: Wages advanced 1% in the fourth quarter, but in a good sign, they slowed from 1.3% in the prior period.
The increase in wages in the 12 months ended in December was flat at 5.1%, however.
Benefits rose at a 0.8% pace in the last three months of 2022. The 12-month increase in benefits was unchanged at 4.9%.
The ECI reflects how much companies, governments and nonprofit institutions pay employees in wages and benefits. Wages make up about 70% of employment costs and benefits the rest.
The big picture: Senior Fed officials want to see a tight labor market loosen up and wage growth decelerate further to help ensure inflation returns to pre-pandemic levels of 2% or so.
The central bank on Wednesday is expected to raise its policy interest rate again. It’s likely to keep raising its rate — or keep them high for longer — until it sees more signs in the ECI or other wage trackers that labor costs are coming down.
The increase in consumer prices slowed to 6.5% at the end of 2022 from a 40-year high of 9.1% last summer, but it’s still more than triple the Fed’s inflation goal.
Looking ahead: “This result is a decent outcome for the Fed, as labor costs appear to be decelerating, but it would be premature to declare victory,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “With the unemployment rate at a 50-year-plus low of 3.5%, it would be exceedingly optimistic to conclude that wage pressures have rolled over.”
“Wage growth is slowing gradually,” said senior U.S. economist Andrew Hunter of Capital Economics said in a note to clients. “The Fed is still likely to keep raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth over the coming months to convince officials to pause the tightening cycle after the March meeting.”
Market reaction: The Dow Jones Industrial Average
DJIA,
-0.06%
and S&P 500
SPX,
+0.16%
were set to open higher in Tuesday trades. Stocks fell on Monday.
