US Wage Growth Slows Yet Remains Ahead of Inflation

Wage and benefit growth in the US has experienced a slight deceleration in the third quarter, with the Employment Cost Index (ECI) increasing by 1.1%, as reported by the Labor Department. This marks a slowdown from the 1% rise observed in the second quarter and indicates a decline in compensation growth from last year’s 4.5% to this year’s 4.3%.

Despite this slowdown, the increase in the ECI has outpaced inflation, suggesting that Americans’ purchasing power has improved. This uptick follows a period during 2021 and 2022 when wage growth was unable to keep up with rising prices. Notably, the ECI had seen its peak growth rate of 5.1% last fall.

While rising wages are typically advantageous for workers, there is concern that companies may pass on the increased labor costs to consumers through higher prices, potentially fueling inflation. Alternatively, businesses might opt to sustain thinner profit margins or enhance operational efficiency to absorb the costs associated with higher wages without increasing prices.

Federal Reserve Chair Jerome Powell has indicated that annual wage growth of about 3.5% aligns with the central bank’s inflation target of 2%.

In addition, the robust US labor market witnessed an unexpected 1.1% rise in employment costs in the third quarter, raising concerns about persistent inflation being above the Federal Reserve’s target. The ECI rose by 1% in the second quarter and showed a year-on-year increase of 4.3%. This marks the smallest annual gain since the end of 2021 but is still above the pre-pandemic average.

Additionally, while wage growth in the private sector remained modest, state and local government salaries saw significant increases, with government worker wages nearing record highs of 7.8%. This contributed to a rise across the yield curve, particularly at the shorter end.

Economists often favor the ECI as it is less affected by changes in employment levels across different sectors. Other commonly referenced measures include average hourly earnings from the monthly jobs reports. The current economic landscape, influenced by recent federal policies, is complicating the Federal Reserve’s efforts to manage inflation effectively.