Key indicator shows signs of cooling wage growth
- Courtenay Brown, author of Axios Macro
A waiter walks among tables at a New York City restaurant. Photo: Spencer Platt/Getty Images
A closely-watched indicator that tracks what employers pay workers in wages and benefits, rose 1.2% last quarter, the Labor Department said on Friday — a slightly cooler pace than compensation growth in the prior quarter.
Why it matters: The Employment Cost Index shows that wage growth is still hot. The data suggests that the Federal Reserve's fear of a wage-price spiral is — so far — not playing out as inflation pressure builds across the economy.
- The Fed's favorite inflation gauge, also out on Friday, showed that prices (excluding volatile food and energy costs) rose 0.5% in September, matching August's rapid pace.
- Compared to a year ago, the core personal consumption expenditures index rose 5.1% — above than the 4.9% registered the prior month.
Catch up quick: Wages have risen rapidly in the past year, as a tight labor market forces employers to bid up wages to attract workers. Still, in most industries, wages have not risen as quickly as inflation has.
- The Fed, which has raised interest rates rapidly to contain inflation, has warned about the potential of a wage-price spiral. That scenario plays out like this: Higher prices push workers to demand higher wages. That increases costs for their employers, which may push them to up prices for their products. The cycle continues — and inflation becomes deeply embedded in the economy.
- Last December, Fed chair Jerome Powell cited a hot reading of the Employment Cost Index as the main reason why he became more concerned about inflation.
State of play: Data released on Friday suggested few signs of this dreaded outcome, at least so far.
- Compared to a year ago, the Employment Cost Index showed compensation among all civilian workers rose 5% in the third quarter, slightly slower than the 5.1% in June.
- For private-sector workers, compensation costs rose 1.1% last quarter, compared to the 1.5% in the second quarter.
- State and local government workers saw compensation costs rise last quarter to 1.9%, up from 0.8% in the prior period.