The fourth quarter saw a slower-than-expected growth in employment expenses, suggesting that inflation pressures on business owners have at least leveled off.
The Labor Department said on Tuesday that the employment cost index, a gauge the Federal Reserve constantly monitors for signals of inflation, climbed 1% between October and December. That was a little lower than the 1.1% Dow Jones prediction and lower than the third-quarter reading of 1.2%. It was also the smallest quarterly gain all of last year.
The cost of benefits climbed just 0.8% over time, down from 1% during the previous period, while wages and salaries also increased by 1%, down by 0.3 percentage points.
Comparatively speaking, government employee compensation increased at a significantly slower rate in the quarter, growing by just 1% as opposed to 1.9% in Q3.
The ECI is a key inflation indicator in the eyes of the Fed because it takes into account the increased demand for certain professions as well as the disproportionate wage growth in some industries, including those most severely impacted by the pandemic.
The Q4 number is released on the same day as the Federal Open Market Committee’s two-day policy meeting, which sets interest rates, starts. The FOMC’s decision to approve a 0.25 percentage point rate hike before its Wednesday meeting ends has been almost assured by the markets.
However, what authorities indicate about the direction of monetary policy will be the main emphasis.
The markets are expecting one more quarter-point increase in March, then a break and one or two cuts before the year is out. Officials from the Fed have rejected the idea of any policy easing in 2023, although they might reconsider if inflation readings continue to decline.
According to Andrew Hunter, senior U.S. economist at Capital Economics, “the Fed is still likely to keep raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth over the coming months to convince officials to pause the tightening cycle after the March meeting.”
The Labor Department will release its monthly nonfarm payrolls report on Friday, which will be the following significant data point.
According to economists, payrolls will rise by 187,000 in January, and average hourly earnings will rise 4.3% annually after gaining 4.6% at the end of 2022.