Employee costs in the U.S. rise at slowest pace in 2 1/2 years. More ammo for Fed rate cut?

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The numbers: The cost companies pay to employ workers rose 0.9% in the fourth quarter to mark the smallest increase in two and a half years, another sign that rapid wage growth after the pandemic is waning.

The rise in the employment cost index was the smallest since the spring of 2021. Compensation had climbed at least 1% for 10 straight quarters for the first time since the late 1980s.

Higher wages can add to inflation if they rise faster than the economy’s natural rate of growth.

Compensation increased at 4.2% pace in the 12 months ended in December, the government said Wednesday.

While that’s the smallest increase in two years, it’s still above the 3.5% rate or so that the Fed would like to see. Still, the slowdown in wage growth gives the central bank the scope to cut interest rates later this year.

Big picture: After spiking in the past few years, wage growth is returning to more normal levels.

The economy has slowed enough to temper the demand for labor and workers are not quite as willing to switch jobs.

Labor costs are still rising too fast for the Fed’s comfort, however.

Key details: The cost of wages and salaries rose 0.9% in the fourth quarter.

The increase in wages in the 12 months ended in December registered 4.3%, down several ticks from the prior quarter. They peaked at 5.2% in 2022.

Benefits rose 0.7% from October to December.

The 12-month increase in benefits slowed to 3.8% from 4.2% in the third quarter and a peak of 5% in 2022.

The ECI is seen as the most reliable measure of labor costs. It 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.

Looking ahead: “The moderation in compensation growth is consistent with the slowdown in job growth and easing in inflationary pressures that will allow the Fed to reduce interest rates later this year,” said senior economist Jay Hawkins at BMO Capital Markets.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.10%

rose, while the S&P 500
SPX,
-0.69%

fell, in Wednesday trading.



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