US Wage Growth Challenges Fed’s Anti-Inflation Efforts

In the third quarter of 2021, increasing wages and benefits in the US presented a notable challenge for the Federal Reserve in its fight against inflation. The Labor Department reported that the Employment Cost Index (ECI), an essential measure of compensation, rose by 1.1%, slightly higher than the 1% increase in the previous quarter. However, when accounting for rapid inflation, overall compensation growth fell to just 0.6% compared to the same period the previous year, showing a significant decline from the 1.6% increase in the second quarter.

Economists have highlighted a cooling trend in average earnings. Wages and salaries for private sector employees, excluding bonuses and incentive pay, saw only a 0.9% increase, down from 1.1% in the prior quarter. The ECI is a critical metric for Federal Reserve officials as it tracks pay changes across identical job roles over time.

In the fall of the previous year, ECI-tracked pay and benefits growth peaked at 5.1%. However, escalating inflation has diminished Americans’ purchasing power. The Federal Reserve aims to temper inflation to support inflation-adjusted income gains even amidst smaller salary increases. Fed Chair Jerome Powell has indicated that annual wage growth of about 3.5% aligns with the central bank’s 2% inflation target.

As of October this year, Europe saw its inflation rate drop to 2.9%, attributed to declining fuel prices, although overall growth has remained sluggish. Rising interest rates and an unpredictable economic landscape may lead the Federal Reserve to adopt a cautious approach. Meanwhile, the US has shown solid wage growth this summer, further complicating the Fed’s efforts to control inflation.