Workers’ wages grew faster in the first quarter, a possible concern for the Fed

WASHINGTON – U.S. workers’ wages and benefits grew faster in the first three months of this year, a trend that could contribute to higher inflation and raise concerns about the future path of price increases at the Federal Reserve.

Compensation as measured by the government’s Employment Cost Index rose 1.2% in the January-March quarter, up from a 0.9% increase in the previous quarter, the Labor Department reported Tuesday. Compared to the same quarter last year, compensation growth was 4.2%, the same as in the previous quarter.

Rising wages and benefits are good for workers, no doubt, but it could increase the Fed’s concerns that inflation could remain too high in the coming months. The Fed is expected to keep its short-term key rate unchanged after the conclusion of its latest policy meeting on Wednesday.

Fed Chairman Jerome Powell and other officials recently backed away from signaling that the Fed will necessarily cut rates this year after several months of higher-than-expected inflation readings. Big price increases for rent, car insurance and health care have kept inflation stubbornly above the Fed’s 2% inflation target.

As a result, Fed officials have gone from suggesting that they could cut rates up to three times this year to emphasizing that they will wait until there is evidence that inflation is steadily declining toward 2% before taking any action. measure.

“The persistence of wage growth is another reason for the Fed to delay rate cuts,” wrote Paul Ashworth, an economist at Capital Economics, a consulting firm, in a research note.

The pace of workers’ compensation plays an important role in companies’ labor costs. When wages accelerate especially quickly, companies’ labor costs increase, which often respond by increasing their prices. This cycle can perpetuate inflation.

However, companies can offset the cost of higher wages and benefits by becoming more efficient or productive. Over the past three quarters, productivity has increased at a healthy pace, which, if sustained, would allow companies to pay workers more without necessarily having to raise prices.

The surge in compensation growth in the first quarter was driven by a large increase in benefits, which jumped 1.1%, up from 0.7% in the fourth quarter of last year. State and local government wages and benefits also drove the overall increase, increasing 1.3% in the first quarter, up from 1% in the fourth, while private sector compensation growth increased by a smaller amount, to 1.1%. %, compared to 0.9%.