Employment costs rose at a slower-than-expected pace in the fourth quarter, indicating that inflationary pressures on business owners are at least leveling off.
The employment cost index, a barometer the Federal Reserve watches closely for signs of inflation, rose 1% in the October-December period, the Labor Department reported Tuesday. That was slightly below the Dow Jones estimate of 1.1% and less than the reading of 1.2% in the third quarter. It was also the lowest quarterly profit in a year.
Wages and salaries for the period also rose by 1%, down 0.3 percentage points, while benefit costs only increased by 0.8%, down from 1% in the previous period.
Public employee compensation grew at a much slower pace compared to the quarter, slowing to a 1% increase from 1.9% in the 3rd quarter.
Fed officials consider the ECI an important gauge of inflation because it adjusts for occupations that are in demand and for large wage growth in particular industries, such as those most affected by the pandemic.
The Q4 reading comes on the same day that the rate-setting Federal Open Market Committee begins its two-day policy meeting. Markets have assigned a near-certainty to the FOMC approving a 0.25 percentage point rate hike before delaying it on Wednesday.
But the greater focus will be on what officials signal about the future of monetary policy.
Markets expect another quarter-point increase in March, followed by a pause and then one or two cuts before the end of the year. Fed officials have pushed back on the notion of any policy easing in 2023, though they may change their minds if inflation readings continue to ease.
“The Fed is still likely to continue raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth in the coming months to convince officials to stop the tightening cycle after the March meeting,” wrote Andrew Hunter, senior US economist in Capital Economics.
The next big data point comes Friday, when the Labor Department releases its monthly nonfarm payrolls report.
Economists expected payrolls to rise by 187,000 in January, while average hourly wages were projected to grow 0.3% monthly and 4.3% year over year, after rising 4.6% at the end of 2022.