Labor costs rose more slowly than expected in the fourth quarter, suggesting that inflationary pressures on business owners are at least easing.
The employment cost index, a barometer the Federal Reserve closely monitors for signs of inflation, rose 1% in the October-December period, the Labor Department reported on Tuesday. That was slightly below the Dow Jones estimate of 1.1% and below the 1.2% reading in the third quarter. It was also the lowest quarterly profit in a year.
Wages and salaries for the period also increased by 1%, down 0.3 percentage points, while the cost of benefits rose by just 0.8%, compared with 1% in the previous period.
Compensation for government employees grew comparatively much more slowly during the quarter, decelerating to a 1% gain from 1.9% in the third quarter.
Fed officials consider the ECI a key indicator of inflation as it adjusts for occupations that are in higher demand and outsized wage increases in certain industries, such as those hardest hit by the pandemic.
The reading for the fourth quarter comes on the same day that the rate-setting Federal Open Market Committee begins its two-day monetary policy meeting. Markets have given the FOMC almost certainty to approve a 0.25 percentage point rate hike ahead of Wednesday’s adjournment.
But the bigger focus will be what officials are signaling about the future of monetary policy.
Markets are expecting another quarter-point rise in March, followed by a pause and then a cut or two before year-end. Fed officials have dismissed the idea of monetary easing in 2023, although they may change their minds if inflation readings ease further.
“The Fed is likely to continue raising rates at the next few meetings, but we expect wage growth to slow further in the coming months to persuade officials to break the tightening cycle after the March meeting,” wrote Andrew Hunter, Sr US economist at Capital Economics.
The next big data point comes on Friday when the Labor Department releases its monthly nonfarm payrolls report.
Economists expect the workforce to have risen by 187,000 in January, while average hourly wages are expected to rise 0.3% monthly and 4.3% year-on-year after rising 4.6% at the end of 2022.
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