This year, the increase in Americans' salaries has been higher than expected.
An important indicator of labor costs recently revealed quickened growth of wages and benefits compared to estimates, giving more concern to Fed officials hoping for lessening inflationary pressures.
The Employment Cost Index (ECI) rose 1.2% in a seasonally adjusted quarterly increase, faster than the 0.9% surge in the previous quarter, revealed data from the Bureau of Labor Statistics released on Tuesday.
"This isn't going to be a relief for the Fed," said Scott Anderson, the chief economist at BMO Capital Markets, speaking to CNN.
Fed authorities are scrutinizing the pace of wage increments with the fear that increased compensation could contribute to inflationary pressures.
The primary reason behind the index's most significant quarterly rise in a year was higher benefits costs, which jumped from a 0.7% gain the previous quarter to 1.1%. However, wage and salary growth remained unchanged at 1.1%.
In the 12 months leading up to March, wage gains stayed steady at a rate of 4.2%, while the index that gauges compensation adjustments experienced no change. However, the biggest wage rises were found in the public sector, where workers experienced a 4.8% compensation increase over the same period.
Taking inflation into account, the combined wages and benefits increased a paltry 0.8% annually, down slightly from a 0.9% rise before.
Economists predicted quarterly growth of 0.9% and slowing annual growth to 4%. Futures markets saw the news reflected in changes, with Dow futures falling by approximately 185 points or 0.5%, in premarket trading on Tuesday. Futures also saw declines of 0.43% on the S&P 500 and 0.46% on the Nasdaq Composite.
Not cool enough for the Fed
The ECI is favored by the Fed since it gives a detailed overview of wages and includes benefits in addition to salaries. The index measures how wage costs change for the same positions over time, accounting for shifts in job roles.
In the nation's post-pandemic economic recovery, wage gains spiked significantly under the pressure of high demand for employees. Last year's second quarter saw annual labor cost gains peak at 5.1%, coinciding with 40-year high inflation rates. While wage increases have since slowed, they nevertheless remain above pre-pandemic norms (2-3%) and higher than the Fed prefers for inflation control (3.5%).
This week's Fed policy meeting will likely see no change in their interest rates, which are expected to be announced on Wednesday. With the recent release of hotter-than-expected inflation data and now increasing wage gains, economists do not foresee a Fed rate reduction in the near future.
"For the Fed to ease, we'll need to see a tremendous decline in payrolls in May and June and similarly spectacular inflation numbers, which isn't an impossible prospect but means we'll now have to look for the first move in September instead," Ian Shepherdson, the chief economist for Pantheon Macroeconomics, noted.
Bad news in a good way
Although the cost of living is bucking the desired Fed trends, the current state of the US labor market is seen as a beacon of strength and robustness.
"This is terrific news for the overall economy and the economy's resilience and its strength," said Anderson. "This holds wages up for many people, and keeps consumer spending strong over the next few quarters at least."
Upcoming labor market data is slated for release this week, with the key monthly jobs report due on Friday. Economists are expecting 230,000 job additions, per FactSet estimates.
While a few prominent industries - like healthcare, leisure and hospitality, and government - have seen the most significant monthly gains, the labor market's vitality was maintained across industries, and layoffs stayed minimal.
The labor market's longevity, coupled with ongoing above-average wage growth, encourages increased worker salaries and persistent consumer spending. However, despite pressure on consumers to spend amid high inflation rates in the last three years, the persistently high prices of food and fuel, along with concerns about a worsening employment landscape, have dampened consumer sentiment.
A different report released on Tuesday by the Conference Board showed that consumer confidence dropped in April, determined by higher food and gas prices and worries about the deteriorating labor market. The Conference Board's consumer confidence index fell from an adjusted 103.1 in March to a reading of 97.0, its lowest level since July 2022.
Read also:
Source: edition.cnn.com
