US labour costs climb as inflationary pressures persist


US labour costs have risen sharply, contributing to the rapid climb of inflation as the Federal Reserve prepares to act forcefully to temper demand in the world’s largest economy.

The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the fourth quarter increased 1 per cent, just shy of the record-setting 1.3 per cent jump seen between July and the end of September, and slightly below economists’ expectations.

That translated to a 4 per cent jump for the 12-month period ending last month. Wages shot up 4.5 per cent during that window, nearly double the pace during the same time last year. Benefits rose 2.8 per cent.

Employers in the services sector confronted the biggest increases, with total pay rising 7.1 per cent. For those in leisure and hospitality, costs jumped 8 per cent. Worker shortages that began to intensify last year have been most acute in those industries, leading to heightened competition to attract new talent and retain employees.

Sarah House, senior economist at Wells Fargo, called the slight moderation in the quarter-over-quarter pace “encouraging”, but warned that the economy was not yet “out of the woods” when it came to a worsening inflation situation.

Stephen Stanley, chief economist at Amherst Pierpont Securities, said: “If anything it feels like the momentum is gaining and the first quarter of this year could be even firmer.”

He noted the bid-up in wages heading into the new year. “Unfortunately, that gives some staying power to inflation [which] looks more and more entrenched,” he said.

Line chart of 12-month percent change in wages and salaries for civilian workers, not seasonally adjusted  showing Wages and salaries continue to increase through end of 2021

Jay Powell, the Fed chair, cited the previous ECI release, which showed a 3.7 per cent increase in total pay for the 12-month period ending September, as a primary reason why the central bank decided in December to speed up the scaling back of its stimulus programme.

Rather than continuing to buy government bonds to the end of June, the Fed is now planning to cease purchases of Treasuries and agency mortgage-backed securities in early March, right around the time it is expected to begin raising interest rates for the first time since 2018.

The most recent data on labour costs were released on Friday alongside the Fed’s preferred inflation gauge. The core personal consumption expenditures (PCE) price index increased 4.9 per cent in December from the year before and another 0.5 per cent from the previous month.

That was a modest acceleration from the 4.7 per cent annual pace reported in November and the fastest rise since September 1983. Once volatile items such as food and energy are factored in, the PCE index jumped 5.8 per cent.

An increase in the price of goods drove the bulk of last month’s surge, rising 8.8 per cent in December. Expenses related to services rose 4.2 per cent.

The PCE index is calculated slightly differently than its counterpart, the consumer price index, which is running at a 7 per cent annual pace. The US commerce department also pulls from different sources, relying on business surveys to formulate the PCE index, while the Bureau of Labor Statistics looks at consumer surveys for the CPI.

The data reinforced the central bank’s decision to keep its options open for its monetary policy path forward.

“Getting policy back to a more normal stance is the equivalent of stopping putting lighter fluid on an already blazing bonfire,” said Stanley.

Powell refused on Wednesday, following the first two-day gathering of the Federal Open Market Committee, to even rule out either raising interest rates at each of the seven remaining policy meetings this year or considering supersized adjustments that bump up the federal funds rate by half a percentage point, as opposed to the typical quarter-point increase.

Market expectations for the policy path forward have since shifted, with traders now pricing in roughly four more interest rate increases in 2022 after “lift-off” from the current near-zero levels in March.

Soaring inflation has forced the Fed to assume a much more hawkish stance than initially expected just a couple of months ago. The labour market has also made significant strides and now appears historically tight owing to a severe worker shortage.

Some economists warn that may be too aggressive, especially given that economic growth is expected to slow down this year as consumption falls. Personal spending has already begun to decline, falling 0.6 per cent in December from the previous month.

“Despite the strength of price and wage inflation, it is disappointingly weak real economic growth that will prevent the Fed from delivering a full-blow Rate-maggedon this year,” said Paul Ashworth, chief US economist at Capital Economics.

Powell on Wednesday reiterated that the central bank was “attentive” to the risks caused by “persistent” wage growth, which he warned could lead to even higher inflation. “We have an expectation about the way the economy is going to be evolved, but we’ve got to be in a position to address different outcomes, including the one where inflation remains higher,” he later said.



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