The labor cost index favored by the Federal Reserve has heated up more than expected, indicating that the popularity of the US job market is unabated, and expectations of interest rate cuts will further subside.
Labor costs in the US accelerated in the first quarter, exceeding expectations, highlighting that continued wage pressure is fueling high inflation.
According to data released by the US Bureau of Labor Statistics on Tuesday, the Employment Cost Index (Employment Cost Index), which measures wages and benefits, rose 1.2% in the first quarter, exceeding market expectations by 1%, and the previous value of 0.9%, the biggest increase in a year.
After a series of recent reports showed stubborn inflationary pressure, labor cost data further raised concerns about the Federal Reserve policymakers' progress in achieving the inflation target. On May 1, local time, the Federal Reserve will end the two-day FMOC meeting. The market expects the Fed to maintain high interest rates and is unlikely to cut interest rates in the short term.
Robert Sorkin, senior global economist at Citigroup, commented:
This is a challenging figure for the Federal Reserve. The 1.2% increase shows that inflation data and wage growth data are moving in a direction that is not in line with the target.
Compared to a year ago, the labor cost index has climbed 4.2%. Wages and salaries in the private sector increased for the third consecutive quarter by 1.1%, up 4.4% from a year earlier. This increase includes the impact of minimum wage increases implemented in about half of the US states at the beginning of this year.
After adjusting for inflation, private sector wages rose 0.6% year over year, and wages rose 0.8% year over year. Wages for private service workers rose 1.2% year over year in the first quarter, unadjusted for inflation. Remuneration is a major cost for employers in this industry, and Federal Reserve officials are closely watching one of the inflationary branches known as core services (excluding real estate). The wages of workers in the commodity production industry also rose 1.2%, the highest in a year.
The data also showed that the labor cost index for government departments grew 4.8% year on year
A strong job market and real income growth are key to maintaining consumer demand. Data released last week showed that consumer spending remained resilient despite a slight slowdown in the first quarter.
Compared to the average hourly wage data published by the Non-Farm Agriculture Report, the Federal Reserve favors the labor cost index as an indicator to measure wage levels. This index is not affected by labor transfers between different occupations or industries.
After the data was released, US stock index futures dived, and treasury yields rose in the short term.
However, analysts believe that the influx of immigrants, women, and elderly workers will help increase supply while demand for American labor remains strong.
Other measures of wage growth showed a more moderate growth trend. The Federal Reserve Bank of Atlanta's wage growth tracker (median wage with a three-month moving average) has basically cooled since its peak in 2022. Economists predict that the non-farm payrolls report released this Friday will show a year-on-year decline in average hourly wages in April.