Signs of lingering inflation: Worker pay pressures persist
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New data on Tuesday shows workers still see faster pay growth and pricier benefits than in pre-pandemic times, as the labor market continues to flourish.
Why it matters: That is one huge factor keeping the economy healthy. But it raises red flags for Federal Reserve officials worried about lingering inflation, which now appears more difficult to stamp out than at the end of last year.
- The latest read on worker compensation adds to the barrage of data — including consumer and wholesale prices — that showed an acceleration in inflation pressures in the first quarter.
Driving the news: As the Fed begins a two-day policy meeting on Tuesday, the Labor Department reported the Q1 Employment Cost Index, considered the best barometer of how much employers spend on compensation.
- It rose 1.2% in the first quarter, the Labor Department said. That's up from 0.9% in Q4 and above the 1% analysts expected.
- Over the past year, wages and salaries for all workers are up 4.4% — slightly higher than Q4. That is down from the peak 5.27% seen in 2022, but above the roughly 3% before the pandemic and the inflation shock.
The intrigue: The Q1 increase in compensation was particularly high among public sector workers — which may offer some comfort in that pay of government workers is less likely than the private sector to reflect the core inflationary dynamics of the economy.
- Over the past year, compensation for state and local government workers is up 4.8% — only slightly below the 4.9% peak last year.
- But in some sense, this just reflects that government workers saw smaller pay gains than private sector counterparts as inflation took off in 2021 and 2022, and governments are now adjusting pay to remain competitive.
This "catch-up" effect is a sign that the inflation pressures built up in recent years are still working through the economy in a way that economic policymakers might not have anticipated.
Of note: Elevated compensation growth like that seen over the last year is not necessarily inflationary, given the strong growth in worker productivity.
- But productivity data is volatile, and there are no assurances that the improvement in output per hour of labor will keep rising as rapidly as it did in 2023.
What they're saying: "The Q1 ECI data are a fresh reminder of the long and uneven road we're on to a tamer inflation environment," Oren Klachkin, a financial markets economist at Nationwide, wrote in a note.
- The data "will only bolster the Fed's recent messaging that interest rates need to stay at current levels and that greater confidence is needed before the easing cycle can begin," Klachkin adds.
