U.S. employee pay rose more than expected in the first three months of this year, another sign that inflation may remain high for a long time.
The Employment Cost Index (ECI), which measures worker compensation and benefits, rose 1.2% in the first quarter, beating the Dow Jones consensus estimate for a 1% rise. CNBC first reported.
Tuesday’s reading from the Labor Department, which traditionally signals underlying inflation pressures, also exceeded the 0.9% rise experienced in the fourth quarter of 2023.
Surprisingly strong jobs data in March, with employers posting a whopping 303,000 pay increases last month, better than economists expected, won’t do much to slow inflation either.
Historically, a strong job market keeps wages and consumer spending levels rising, which in turn fuels inflation and interest rates.
The latest economic data leaves Federal Reserve Chairman Jerome Powell’s path forward unclear, but on April 16, Powell said, “Given the strength of the labor market and historical developments in inflation, It is then appropriate to allow more time for restrictive policies to take effect and let the data dictate.” And an evolving outlook will guide us. ”
The Federal Open Market Committee, which decides interest rates, begins a two-day meeting on Tuesday.
At Thursday’s conclusion, Chairman Powell is expected to keep the federal funds rate unchanged at its highest level in more than 20 years.
News of the harsh rise in overall worker pay comes as geopolitical tensions weigh on demand for oil, industrial metals and metals, suggesting the days of energy and other commodities acting as deflationary forces are over. It comes days after the World Bank warned that it could be approaching. Other supplies.
Recent warning signs cast further doubt on the Fed’s ability to push inflation to its 2% target by the end of the year.
To bring inflation down from a summer 2022 peak of 9.1%, the central bank has implemented 11 consecutive interest rate hikes to cool the economy, raising borrowing rates to 5.5% from the current 23-year high of 5.25%. raised to %. .
However, the inflation rate has not yet fallen below 3%. According to the latest consumer price index, prices rose 3.5% in March, the highest year-on-year increase since December, when inflation was 3.4%.
If inflation continues, the Fed has historically raised interest rates further.
Fed officials have already indicated that a rate cut in 2024 may not be on the cards.
“If inflation continues to be flat, you’re going to question whether we need to cut rates at all,” Minneapolis Fed President Neel Kashkari said in an interview earlier this month.
A day later, on Friday, Fed Director Michelle Bowman said interest rates could rise further.
“While this is not my baseline outlook, we continue to see the risk that we may need to raise interest rates further at future meetings if inflation stalls or reverses,” Bowman said. Stated.
In prepared remarks to the New York Fed Watchers Group, he said: “Reducing interest rates too soon, or too soon, could lead to an inflationary backlash that would bring inflation back to 2% over time.” “This will require further hikes in policy interest rates in the future,” he added. In early April.
But Wall Street is still holding off on two rate cuts, the first of which is now widely expected to take place in September.
Traders also expect two 25 basis point rate cuts, for a total of 75 basis points, instead of the three expected cuts this year.
Stubborn inflation complicates President Joe Biden’s claims of steady progress against rising prices.
Biden had previously suggested that lower inflation would lead to Fed rate cuts, but earlier this month, just before data released by the Commerce Department showed gross domestic product (GDP) would grow at an annual rate of 1.6%. hedged its predictions. In the three months to March, it fell below economists’ expectations of 2.4%.
The growth rate was the lowest since 2022, well below the fourth-quarter GDP, which was revised upward to 3.4%, and down from 4.9% in the previous quarter.
More troubling, perhaps unsurprisingly, is that prices remain stable.
A day after the disappointing GDP numbers were released, the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose to 2.8% in the first quarter against the central bank’s target of 2%. %Rose.
