U.S. employment costs jumped by the most on record at the
start of the year, heightening concerns about persistent inflation that set the
stage for more forceful policy action by the Federal Reserve.
The employment cost index, a broad gauge of wages and
benefits, advanced 1.4% in the first quarter, according to Labor Department
figures released Friday. That followed a 1% advance seen in the final months of
2021.
Stock-index futures fell on earnings misses, while the yield
on the 10-year Treasury note climbed. Expectations for a 75 basis-point rate
increase at the Fed’s June meeting jumped after the release.
Compared with a year earlier, the labor costs measure jumped
4.5%, the most in data back to the early 2000s. Unlike the earnings measures in
the monthly jobs report, the ECI is not distorted by employment shifts among
occupations or industries.
Compensation gains last quarter were broad-based across
industries, including strong advances in manufacturing and at service
providers.
Wages and salaries for civilian workers climbed 4.7% from a
year earlier, also the most on record. Benefits rose 4.1%. Excluding
government, private wages increased 5% from a year earlier.
The stretch of healthy gains in employment costs underscores
how rising wages are a key part of the inflationary picture, and if sustained,
will keep pressure on the Fed to take a more aggressive approach to policy. In
March, Fed Chair Jerome Powell said the current pace of pay increases is not
consistent with the central bank’s 2% inflation goal.
Even so, workers’ wages aren’t keeping pace with
decades-high inflation, squeezing households and threatening to slow
consumption.
A separate report Friday showed the Fed’s preferred gauge of
inflation, the personal consumption expenditures price index, rose 6.6% in
March from a year ago, the most since 1982.
Still, inflation-adjusted spending has increased over the
last three months, signaling consumers continue to make purchases in the face
of rising prices.
Job openings are near record highs, leading businesses big
and small to raise wages to attract and retain workers. And while elevated
labor costs have weighed on some companies’ margins, many businesses have
passed along those costs to consumers through higher prices.
But wages are only part of the picture. A combination of
factors are driving up input costs for businesses, including high prices for
materials and ongoing supply chain challenges. S&P Global’s gauge of input
prices surged to a record high this month.
Looking ahead, a tight job market could keep wage growth on
the boil. Labor shortages have eased somewhat, but the leisure and hospitality
sector is still grappling with 1.7 million vacancies.
Companies in recent earnings calls have also noted the ongoing
war for talent. John Greene, chief financial officer of Discover Financial
Services, said Thursday that the company expects “some degree of salary wage
pressure in 2022 and possibly into 2023 as we take steps to remain
competitive.”
But the economy is facing growing headwinds. Recession odds
are creeping higher amid expectations the Fed will move aggressively to get a
handle on red-hot inflation. And the latest figures on economic growth were
weaker than expected. As a result, wage gains may moderate in the months ahead.
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