Workers are seeing 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 today, 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% seen 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.

After a 2023 slump, growth has returned to Europe — while inflationary pressures show no signs of reigniting.

Driving the news: GDP for the 20 nations that use the euro currency rose 0.3% in Q1 (unlike the convention in the U.S., that's not an annualized number), following two straight quarters of contraction.

• That handily beat analysts' expectations and was the strongest growth number for the eurozone since the fall of 2022. It was driven by a resurgence in industrial activity in Germany.
• A separate report showed that while overall inflation was steady in April, core inflation in the eurozone — excluding food and energy — fell to 2.7% year-over-year, from 2.9% in March.

Of note: Services inflation showed a particularly big drop, to 3.7% from 4%. That should reassure leaders of the European Central Bank that there is no inflationary spiral driven by higher wages taking off.

Between the lines: The numbers give the ECB a green light to cut interest rates in June, which would stand in marked contrast to the U.S. Federal Reserve that looks likely to stand pat on rates for some time to come.