Labour costs increased 4.3% on a year-on-year basis, the smallest gain since the fourth quarter of 2021, after advancing by 4.5% in the second quarter. — Reuters
WASHINGTON: US labour costs increased solidly in the third quarter amid strong wage growth, while house price inflation accelerated in August, the latest signs that the Federal Reserve (Fed) could keep interest rates high for some time.
The reports on Tuesday pose a threat to efforts by the US central bank to bring inflation to its 2% target.
The US central bank was expected to leave interest rates unchanged but maintain its hawkish bias as a recent spike in US Treasury yields and stock market sell-off have tightened financial conditions.
“Those wage increases are likely to keep inflation running above target while higher house prices could lead to a pick-up in shelter inflation,” said Andrew Hollenhorst, chief US economist at Citigroup New York.
“For now the Fed will remain on-hold, but the evident upside risk to inflation means chairman Jerome Powell and the committee will keep potential further rate hikes on the table.”
The Employment Cost Index (ECI), the broadest measure of labour costs, rose 1.1% in the last quarter after increasing 1% in the April to June period, the Labour Department’s Bureau of Labour Statistics reported. Economists polled by Reuters had forecast the ECI would rise 1%.
Labour costs increased 4.3% on a year-on-year (y-o-y) basis, the smallest gain since the fourth quarter of 2021, after advancing by 4.5% in the second quarter.
Growth in annual compensation is gradually slowing after peaking at 5.1% last year, in line with some easing in labour market conditions. It, however, remains well above the pre-pandemic pace.
The rise in compensation helps to explain the surge in consumer spending in the last quarter, which contributed to the fastest economic growth rate in nearly two years.
The ECI is widely viewed by policymakers and economists as one of the better measures of labour market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25% to 5.50% range.
Wages increased 1.2% in the third quarter after climbing 1% in the prior three months. They were up 4.6% on a y-o-y basis after advancing by the same margin in the second quarter.
Strong wage growth is being driven by worker shortages that still persist in some services industries.
Though consumers continue to worry about the economy’s outlook, more are planning vacations over the next six months and are not contemplating scaling back in a major way on purchases of motor vehicles and other big-ticket items, according to a survey from the Conference Board on Tuesday.
Their concerns about the economy centre around the violence in the Middle East as well as domestic politics, likely reflecting the protracted battle to elect a speaker in the US House of Representatives.
The Conference Board’s so-called labour market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, rose to 26.3 from 25.5 in September.
This measure correlates to the unemployment rate from the Labour Department. Overall, the consumer confidence index dropped moderately to 102.6 this month from 104.3 in September.
“The US consumer is in okay financial shape,” said Bill Adams, chief economist at Comerica Bank in Dallas.
“For well-off Americans, inflation is a source of frustration but not enough to force cutbacks in overall spending.”
Stocks on Wall Street were trading lower. The US dollar gained versus a basket of currencies. US treasury prices rose.
The compensation report showed private-sector wages gained 1.1% after rising 1% in the April to June quarter. They advanced 4.5% on a y-o-y basis.
There were notable increase in wages in the financial activities and education and health services sectors. But wage growth slowed in the leisure and hospitality industry, which had experienced worker shortages. — Reuters
