US: Labor costs slow, but still rising at a scorching rate

Data released on Friday showed the Employment Cost Index (ECI) rose 1% during the fourth quarter, and 4% during the year. Analysts at Wells Fargo point out the quarterly increase was more restrained than Q3’s 1.3% gain, and they consider that may tamp down fears of a wage-price spiral amid signs businesses are not upping pay at such a frenzied pace.

The ECI includes benefits in addition to wages and salary costs, and also controls for compositional changes in the workforce. That makes it a cleaner read on the degree of labor cost pressures facing businesses. The FOMC’s emphasis on the ECI was on full display in Chair Powell’s December post-meeting press conference, when he highlighted it as a reason, he thought about announcing a faster pace for tapering asset purchases back in November.

The more temperate quarterly gain likely has Fed officials breathing a bit of relief that labor costs did not accelerate further on a sequential basis, but glad they have telegraphed a more hawkish path for policy given that the overall pace of employment costs continue to point to a very tight labor market.

While the cooler quarterly pace of ECI suggests employment costs are not running away, it is far too early to suggest the worst is over when it comes to labor cost growth. Amid an already tight labor market and the Omicron wave dealing a setback for the labor supply outlook, wage pressures are likely to remain firmly upward over the next few quarters.