Labor costs rise at fastest pace in year and a half, ECI shows, in setback to Fed effort to tame inflation

By Jeffry Bartash

Rising wages and benefits could keep inflation elevated

The numbers: The cost of labor for U.S. companies accelerated in the first quarter at the fastest pace in a year and a half, complicating the Federal Reserve's effort to get inflation fully under control.

The employment cost index rose 1.2% in the first three months of the year from 0.9% in the fourth quarter, the government said Tuesday.

That was the biggest increase since the 2022 third quarter and exceeded the 1% forecast of economists polled by The Wall Street Journal.

Compensation soared after the pandemic due to widespread labor shortages and helped to contribute to high inflation.

Compensation costs have slowed from a multidecade high of 5.1% in 2022, but are still far too high for the Fed's comfort.

Wages and benefits rose at a 4.2% pace in the 12 months ending in March, unchanged from the fourth quarter.

The Fed wants to see the annual increase in compensation slow to pre-pandemic levels of less than 3% a year to keep inflation down.

Key details: The cost of wages and salaries rose 1.1% in the first three months of the year the same as in the fourth quarter of 2023.

Union workers saw larger increases than non-union employees. People who work for state and local governments also reaped somewhat higher pay than non-union private-sector employees.

The increase in civilian wages in the 12 months ending in March slowed down a tick to 4.3% from 4.4%.

Benefits jumped 1.1% from January to March, up from 0.7% in the fourth quarter.

The 12-month increase in benefits fell a notch to 3.7%.

The employment cost index is viewed as the most accurate gauge of how much it costs companies, governments and nonprofit institutions to employ their workers. Labor is the single biggest expense for most companies.

Wages make up about 70% of employment costs and benefits the rest. Federal workers are not covered by the report.

Big picture: Compensation is still rising at levels that could make it harder for the Fed to get inflation down to its 2% goal.

The rate of inflation ranges from 2.7% to 3.5% depending on the measure.

The Fed finishes a two-day meeting on Wednesday. The central bank is not expected to cut interest rates until inflation begins to slow again. Prices have picked up in early 2024.

Looking ahead: "The persistence of wage growth is another reason for the Fed to take its time on rate cuts," said Paul Ashworth, chief North American economist at Capital Economics.

Market reaction: The Dow Jones Industrial Average and S&P 500 were set to open lower in Tuesday trading.

-Jeffry Bartash

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04-30-24 0934ET

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