The U.S. Labor Department reported that wages and benefits experienced a slightly faster pace of growth in the July-September quarter compared to the previous three months, providing a boost to workers but raising concerns for the Federal Reserve in its fight against inflation.
According to the Employment Cost Index (ECI), compensation increased by 1.1% in the third quarter, up from a 1% rise in the April-June quarter. However, compared to a year ago, compensation growth slowed slightly to 4.3% from 4.5% in the second quarter.
When adjusted for inflation, total compensation in the third quarter grew by 0.6% compared to a year earlier, a significant decrease from the 1.6% increase seen in the second quarter.
Economists noted that average pay, measured by wages and salaries for private sector workers, excluding incentive pay and bonuses, also cooled down slightly in the third quarter, rising by 0.9% compared to a 1.1% increase in the previous period.
The ECI is a critical measure of wages and benefits for the Federal Reserve as it focuses on how pay changes within the same mix of jobs, making it more reliable than average hourly pay figures that can be influenced by layoffs among lower-income workers.
While higher wages are generally favorable for workers, they can contribute to inflation if companies decide to pass on the increased labor costs through higher prices. Companies may also opt to reduce profit margins or enhance workforce efficiency to accommodate higher wages without raising prices.
Federal Reserve Chair Jerome Powell has suggested that annual pay increases of around 3.5% are in line with the central bank’s 2% inflation target. The central bank’s goal is to curb inflation, ensuring that even smaller pay increases translate into inflation-adjusted income gains.
