Labor costs for U.S. companies rose much faster than expected in the first quarter, pushing back against expectations that the U.S. Federal Reserve would cut interest rates by the end of the year, raising the prospect of sustained inflation. .
The employment cost index rose 1.2% from January to March, accelerating from the 0.9% increase recorded at the end of 2023, according to the Bureau of Labor Statistics. said on tuesday. This corresponds to an annualized rate of 4.8%, the highest level since the third quarter of 2022.
The growth rate in the first quarter exceeded the consensus estimate of 0.9%. This exceeded the upper end of the Econoday survey’s expected range.
The Employment Cost Index (ECI), a broad measure of labor costs that includes wages and benefits, is closely watched by Fed officials and considered by many economists to be the best measure of wage inflation. It is considered the most accurate measure of how much labor costs businesses, nonprofits, and governments.
Fed officials said they believe the rate of increase needs to approach pre-pandemic levels of around 3% a year for inflation to sustainably return to its 2% target.
Compared to a year ago, personnel costs rose by 4.2%. Before rounding, the ECI rose by 4.193%, slightly higher than the 4.177% recorded at the end of last year.
Wage and salary costs, which account for about 70% of the index, rose 1.1% in the first three months of this year, matching the rate of increase in the final quarter of last year. The increase in ECI was due to an increase in benefit costs, which increased by 1.1% from his 0.7% increase in the previous quarter. Over the past 12 months benefit costs increased by 3.7%.
Wage and benefit costs for private sector employers rose 1.1% in the first quarter, up from 1% in the previous quarter and the highest level since the first quarter of last year. Annualized, this equates to an increase of 4.5% for him. Compared to 12 months ago, his ECI in the private sector increased by his 4.2%.
Adjusted for inflation, private sector compensation increased by 0.6% year-on-year, while wages increased by 0.8%.
An unexpected rise in labor costs is likely to heighten concerns that inflation is accelerating. Major inflation indicators such as the Consumer Price Index, Producer Price Index and Personal Consumption Expenditure Price Index all show that inflation was higher in the first three months of this year than at the end of last year.
The market-implied probability of a Fed rate cut fell to about 50% on Tuesday after the ECI announcement, down from about 58% on Monday. The odds that the market will cut rates by the end of the year are now 3:1, down from 4:1 recently.
