Inflation encourages a record decline in employment compensation

New York
CNN Business

Skyrocketing inflation robs Americans of their raises.

Total compensation costs for civilian workers fell by 3.7% in the last 12 months ending in March, after taking inflation into account, according to the Employment Cost Index report published on Friday.

This is the largest decline since the Bureau of Labor Statistics started inflation-adjusted items in 2001. It also comes at a time when compensation costs – which include wages employers pay plus health, retirement and other benefits – are rising rapidly, before accounting for inflation, as employers try to fill positions and keep employees.

The data, which tracks changes in employers’ labor costs, quantifies the pain people feel when prices rise faster than they have in the last 40 years. The rising costs of food, petrol and housing are eroding workers’ pay cuts.

Inflation-adjusted wage costs fell 3.6%, while performance costs fell 4.2%, both of the largest declines since the series started 21 years ago.

“For workers, this is bad news,” said Jason Furman, an economics professor at Harvard University and former head of the Council of Economic Advisers in the Obama administration, about the inflation-adjusted data. “Wages have fallen very rapidly over the past year and are far below what they were two years ago.”

But at the same time, the super-tight labor market is forcing employers to raise wages and benefits in order to attract and retain workers. This raises concerns about the duration and prevalence of inflation.

Federal Reserve chief Jerome Powell has pointed to data on the cost of employment index as a factor in the central bank’s decision to raise interest rates last month for the first time since 2018.

Compensation costs for civilian workers increased by 1.4% higher than expected for the first quarter of 2022, before adjusting for inflation, according to the index. Labor costs rose by 1.2% and benefits costs rose by 1.8% from December.

Looking at the last year ending in March, the unadjusted cost of compensation increased by 4.5%, compared to 4.0% for the 12-month period ending in December.

Wage costs increased by 4.7%, compared with 4.5% for the year ended December, and benefits costs increased by 4.1%, compared with 2.8%.

The latest compensation report is likely to keep the Fed in a rather hawkish mood, said Kathy Bostjancic, US chief economist at Oxford Economics. She expects the central bank to raise interest rates by another 50 basis points at its political meetings in May and June.

“What they are worried about is that this higher inflation has persisted for so long that if it starts to seep into the expectations of consumer companies, then it is harder to twist inflation out of the system than just waiting for supply chains to correct,” she said.

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