Home News Wages and Benefits Growth Deals Yet Another Blow to Fed in Inflation Fight

Wages and Benefits Growth Deals Yet Another Blow to Fed in Inflation Fight

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Key Takeaways

  • An index measuring employee compensation grew 1.2% in the first quarter, more than economists expected.
  • The Federal Reserve keeps a close eye on wage growth, as it can fuel inflation.
  • This is the latest economic data showing inflation and its contributing factors are running hotter than economists and investors expected.

Employee compensation growth was good for employees in the first quarter, but it was a bad sign for the Federal Reserve’s fight against inflation.

Total wages and benefits for employees rose 1.2% in the 2024 first quarter, a jump in the Employment Cost Index (ECI) from the 2023 last quarter. The data from the Bureau of Labor Statistics came in higher than the 1.0% economists surveyed by the Wall Street Journal and Dow Jones Newswire expected. 

“On balance, today’s ECI reading is not the end of the world for the FOMC, but it is yet another data point that suggests the inflation slowdown that began this time last year stalled out in the first quarter of 2024,” wrote Wells Fargo economists Sarah House and Michael Pugliese. The Federal Open Market Committee, or FOMC, is the Fed’s monetary policy committee.

Inflation On A Bumpy Path

Economists said the report on compensation showed inflation continues to be a challenge for Federal Reserve officials trying to get it down from its current levels of around 2.7%. Higher wages can have an impact on inflation, as business owners raise prices on goods and services in order to meet the higher employment costs. 

“We do expect wage growth and inflation to slow as the year progresses, but the Fed will need several months of good news on wage growth and inflation before it regains some confidence that inflation is back on a sustainable path to 2%,” wrote Oxford Economics’ Nancy Vanden Houten.

The FOMC is meeting this week and is expected to keep interest rates unchanged. Investors have already pushed back expectations of an interest rate cut to later this year as Fed officials have said they are closely watching data on wages, inflation and economic growth. 

“The acceleration in the ECI supports the narrative that the last leg down in inflation is going to be slow and uneven and reinforces our call for the Fed to remain on hold until September,” wrote Jay Hawkins, senior economist at BMO Economics. 

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