Wage and benefit growth in the US has seen a slight slowdown in Q3, with the Employment Cost Index (ECI) rising by 1.1%, according to data released by the Labor Department. This increase, although a deceleration from Q2's 1% rise, signifies a reduction in compensation growth from last year's 4.5% to this year's 4.3%.
Despite the slowdown, the rise in ECI still exceeded inflation, indicating an improvement in Americans' purchasing power. This comes after a period where wage increases lagged behind inflation throughout 2021 and 2022. The ECI had previously reached its peak with a 5.1% growth rate last fall.
While wage growth is generally beneficial for employees, it could potentially exacerbate inflation if companies decide to pass on increased labor costs through price hikes. Alternatively, businesses may choose to maintain slimmer profit margins or enhance workforce efficiency to manage higher wages without resorting to price escalation.
Federal Reserve Chair Jerome Powell has previously stated that annual wage increases of around 3.5% are in line with the central bank's 2% inflation target.
In related news, the strong US labor market recorded an unexpected 1.1% rise in employment costs in Q3, leading to concerns about sustained inflation above the Federal Reserve's target. The ECI, which serves as a comprehensive indicator of wages and benefits, climbed by 1% in Q2 and reported a year-on-year increase of 4.3%. This is the smallest annual advance since the end of 2021 but remains higher than the typical pre-pandemic pace.
Notably, modest wage growth was observed in the private sector, while state and local government salaries surged significantly. Government worker wage growth reached near-record highs at 7.8%, contributing to a spike across the yield curve, especially at the short end.
Economists tend to favor the ECI as it is not distorted by shifts in employment among different occupations or industries. Other frequently reported metrics include average hourly earnings from the monthly jobs report. Current economic conditions, influenced by Bidenomics and the Re-Inflation Reduction Act, are complicating the Federal Reserve's strategy to manage inflation.
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