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A measure of wages and benefits that Federal Reserve officials have been watching closely as they try to gauge the heat of the labor market grew at a moderate pace over the summer.
He Employment Cost Index, a quarterly inflation measure from the Labor Department that tracks changes in wages and benefits, rose 1.1 percent in the third quarter of 2023 compared to the previous three months. That was slightly faster than the 1 percent economists expected and above the previous reading of 1 percent.
Still, that pace of growth is a slowdown in a series of fast quarterly profits in 2022. And on an annual basis, wage increases continue to slow: The employment cost measure rose 4.3 percent annually, down from the 4.5 percent reading in the previous report.
The index averaged a 2.2 percent annual increase in the decade before the pandemic, underscoring that although the pace of wage growth is slowing, the current pace remains rapid.
Rapid wage increases are good news for households, but may pose a challenge for policymakers. Federal Reserve officials often fear that it will be difficult to completely quench inflation if wage increases rise rapidly. Companies that pay higher wages to workers are likely to try to charge more to cover their costs.
Federal Reserve officials are meeting this week to discuss what to do next with interest rates, and are expected to hold borrowing costs steady as they conclude their two-day meeting on Wednesday. They have already raised interest rates to a range of 5.25 to 5.5 percent, from near zero in March 2022, in a bid to curb inflation.
Higher rates make it more expensive to borrow money to buy a home, buy a car, or expand a business. As companies hire less voraciously and demand declines, wage growth should slow and companies should find it harder to raise prices without losing customers. This chain reaction is expected to curb inflation.
But the job market’s cooling has been unexpectedly bumpy. Employment growth has slowed somewhat, but stay much faster than many economists expected after so much action from the Federal Reserve. That’s why Federal Reserve officials are watching wages so closely.
If wage growth is more modest even when companies are hiring, it suggests that continued job gains are being driven by an improvement in the supply of applicants, and that the labor market is still regaining equilibrium.
The logic is simple: if the labor market were on the rise, companies would pay more and more while trying to steal needed employees from each other. That would keep wage gains rising rapidly. If it were cooling toward a more normal level of tightening, economists would expect wage increases to recede.
Another closely watched measure of wage growth, the average hourly earnings index released each month as part of the nonfarm payrolls report, has been showing constant moderation.
That indicator is useful because it appears frequently, but it is also susceptible to data anomalies. It tends to move as the composition of the workforce changes. If many low-wage workers gain employment, for example, the measure of hourly earnings may decline.
Given that, Fed officials closely monitor the employment cost index, which avoids some of the data problems that plague other wage measures.
