10:35 a.m. ET, January 31, 2024
Wage growth is now slower than it has been since 2021
U.S. wage growth cooled to its slowest pace in more than two years in the final months of 2023, according to a closely watched measure by the Federal Reserve, providing the latest evidence of easing inflation pressures.
The employment cost index, a comprehensive measure of employers' labor costs, rose 0.9% from October to December, new data released Wednesday showed.
That represents a slowdown from the 1.1% gain in the third quarter and is below economists' expectations, according to FactSet estimates. The index takes into account wages and benefits paid to U.S. workers.
Still, the fourth-quarter increase exceeded anything seen in the decade before the Covid-19 pandemic. The ECI never exceeded 0.8 percent on a quarterly basis from 2008 to 2020. Excluding benefits, wages rose 0.9 percent in the fourth quarter, an even steeper decline from the 1.2 percent in the third quarter.
The latest ECI readings suggest a slowdown in the labor market, which bodes well for slower inflation and eventual interest rate cuts.
“We continue to expect wage growth to moderate in the coming months as labor market conditions weaken and labor demand becomes more aligned with labor supply,” Gregory Daco, chief economist at EY-Parthenon, said in a note on Wednesday.
“In a world where wage growth weakens, pricing power declines and monetary policy remains tight, we believe inflation will continue to move toward the Fed target,” he said.
Wage and benefit growth in service industries such as education and health care slowed in the fourth quarter, while it picked up in manufacturing. Wage gains among U.S. workers in retail, finance, construction and utilities fell from October to December, while they rose sharply in transportation and warehousing, from 0.8% to 3.1%.
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