Economic Report: U.S. employment costs jump again and offer little comfort to Fed in inflation fight


The numbers: The employment cost index rose a sharp 1% in the fourth quarter, giving little comfort to a Federal Reserve that worries a rapid rise in wages could make it harder to tame inflation.

Economists polled by The Wall Street Journal had forecast a 1.1% increase.

Labor costs grew more slowly for the third quarter in a row, but they are still rising far faster than the Fed would like.

Compensation climbed at a 5.1% clip in the 12 months ended in December, leaving the increase in worker pay near the highest level in 40 years. It was up a tick from the third quarter rate of 5%.

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 rose 1% in the fourth quarter. They make up about 70% of employment costs.

The increase in wages during the 12 months ended in December was un chanmged at 5%.

Benefits increased at a 0.8% pace in the fourth quarter. They make up the rest of worker compensation.

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. 

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 a key interest again. It’s likely to keep raising rates — or keep them high for longer — until it sees more signs in the ECI or other wage trackers that labor costs are slowing.

The rate of increase in consumer prices slowed to 6.5% at the end of 2022 from a 40-year high of 9.1% last summer, but that’s still more than triple the Fed’s inflation goal.

Market reaction: The Dow Jones Industrial Average

and S&P 500

were set to open lower in Tuesday trades. Stocks fell on Monday.

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