Labor Costs Edge Up, Offering Fed Officials a Glimmer of Hope
The latest employment cost index (ECI) report brings a hint of optimism to Federal Reserve officials, who have been grappling with stagnant inflation rates towards the end of 2024. According to the Labor Department’s Bureau of Labor Statistics, labor costs inched up 0.9% in the fourth quarter, mirroring economists’ forecasts.
A Crucial Indicator of Labor Market Slack
The ECI, widely regarded as a reliable measure of labor market slack and a predictor of core inflation, adjusts for composition and job-quality changes. This makes it a vital tool for policymakers seeking to understand the intricacies of the labor market. The 0.9% gain in the fourth quarter follows a 0.8% rise in the previous quarter, indicating a moderate increase in labor costs.
Wages and Salaries Drive Labor Costs
Wages and salaries, which account for the bulk of labor costs, rose 0.9% last quarter, building on a 0.8% gain in the July-September quarter. On an annual basis, wages increased 3.8%, slowing slightly from the third quarter’s 3.9% rise. When adjusted for inflation, overall wages saw a 0.9% increase in the 12 months through December, supporting consumer spending.
Private Sector Wages and Salaries See Modest Growth
Private sector wages and salaries rose 0.9% last quarter, contributing to a 3.7% annual increase. State and local government wages, meanwhile, gained 1.0% last quarter, matching the gain in the previous quarter. They rose 4.5% in the 12 months through December.
Benefits for All Workers Climb
Benefits for all workers climbed 0.8% last quarter, matching the third quarter’s gain. On an annual basis, benefits increased 3.6%, down from the 3.7% rise in the July-September quarter.
Fed’s Policy Easing Cycle Continues
The Federal Reserve, which left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range, has forecast only two rate cuts this year. This cautious approach reflects uncertainty surrounding the economic impact of President Donald Trump’s policies, which economists view as potentially inflationary. As the Fed navigates the complex landscape of labor costs and inflation, the latest ECI report offers a glimmer of hope that progress may be made in the fight against inflation.
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