A key measure of the costs to employ U.S. workers unexpectedly accelerated over the summer, highlighting fears that the U.S. economy could be hit with a second wave of inflation or require additional pressure from the Federal Reserve to bring inflation back down to its two percent target.
The Employment Cost Index, a barometer of wages and benefits compiled each quarter by the Department of Labor, rose 1.1 percent in the third quarter of 2023 compared with the second quarter. This was an acceleration from the one percent rise recorded in the prior quarter and above the range of forecasts in a survey conducted by Econoday.
That pace is well above what most economists think is consistent with prices rising at the Fed’s two percent target. Fed officials closely watch the Employment Cost Index for signals about inflationary pressures.
Compared with the third quarter of 2022, the index is up 4.3 percent, which is below the 4.5 percent annual gain recorded in the previous quarter.
Still, the index running nearly twice as fast as it did in the decade prior to the pandemic, when the typical gain was 2.2 percent a year.
Many economists had been expecting the labor market to lose steam in the second half of the year. Instead, claims for unemployment benefits have fallen to a very low level and stayed there. What’s more, overall economic growth accelerated to an annual pace of 4.9 percent in the fourth quarter. Inflation for goods purchased by U.S. consumers rose 0.4 percent in September, faster than expected, the equivalent of a 4.4 percent annual pace, according to the Commerce Department’s personal consumption expenditure price index.
Wage gains can be good for households in theory but in practice they are often offset by rising prices, as households use higher wages to bid up the prices of goods and services. In the 12 months through September, the personal consumption price index rose 3.4 percent, leaving workers with a real gain of less than one percent. For the quarter, prices rose 0.7 percent, leaving workers with a gain of three-tenths of a point.
Other measures of inflation, including the Labor Department’s consumer price index, were up by even more over the past year. The CPI rose 3.7 percent over the 12 months through September. By this measure, then, wage gains were even more muted.
Fed officials are meeting this week to reassess monetary policy. They are widely expected to hold their benchmark target steady at a range of 5.25 percent to 5.5o percent. Markets currently reflect some uncertainty about whether the Fed will raise rates again at its final meeting this year in December and how long the Fed will keep rates high.
Wages and salaries for private sector workers rose 1.2 percent in the July through September period and were up 4.6 percent from a year earlier. Wages for government employees, which often lag private sector wages, rose 1.8 percent from the prior quarter.