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US worker pay gains picked up in the first quarter

<i>Angus Mordant/Bloomberg/Getty Images</i><br/>A worker carries shirts inside a Mango store in the SoHo neighborhood of New York
Bloomberg via Getty Images
Angus Mordant/Bloomberg/Getty Images
A worker carries shirts inside a Mango store in the SoHo neighborhood of New York

By Bryan Mena, CNN

Compensation for US workers picked up in the first three months of the year, showing that a major source of inflationary pressure persists and cementing the path for an interest rate hike at the Federal Reserve’s meeting next week.

The Employment Cost Index, released Friday by the Bureau of Labor Statistics, showed that workers were paid 1.2% more in wages and benefits in the first quarter from the prior three-month period. That’s up from analysts’ expectations of 1.1%.

The report is closely watched by officials at the Fed because of the role that high labor costs can play in feeding inflation. When businesses struggle to hire and retain workers — an issue many companies are still dealing with — they beef up compensation, then those costs are typically passed on to consumers.

Wages and salaries paid to workers rose 5.1% in March from a year earlier, up from the 5% annual rise in March 2022. Service-providing businesses contended with the highest labor costs in the first quarter.

Still, compensation gains have slowed from their highest level on record in the first half of 2022. That coincides with a gradual cooling in average hourly earnings, which grew 4.2% in March from a year earlier, down from the 5.9% rise in March 2022.

The ECI reading shows the Fed that some underlying pressures on consumer prices remain. Economists expect the Fed to raise interest rates by a quarter point at its meeting next week.

“The Fed needs a pretty substantial increase in unemployment to reduce overall aggregate demand, which would then lead to layoffs, less competition for labor, and lower wages,” said Thomas Simons, a senior economist at Jefferies. “Short of that, I don’t really see how we would get a quick return to a lower wage trajectory, especially for these lower skilled jobs.”

Simons said a weakened jobs market, including softer wage growth, would be necessary for “the consumer to retrench and break the inflation cycle.”

The Federal Reserve’s favorite inflation gauge showed that overall consumer-price increases slowed sharply in March, but a measure that strips out volatile food and energy prices saw a more moderate decline.

“While inflationary pressures continue to ease, the trajectory is still not moving quickly enough for the Federal Reserve to declare victory,” Quincy Krosby, chief global strategist at LPL Financial, wrote in a note.

The unemployment rate stood at a half-century low of 3.5% in March, though other signs have shown that the labor market is losing momentum. Employers added 236,000 jobs in March, the smallest monthly gain since December 2020, and job openings fell below 10 million in February for the first time since May 2021. However, there were still about 1.7 jobs for every unemployed person seeking work in February.

The labor market’s effects on consumer prices varies by industry, with service-providing businesses still a source of inflationary pressures while other businesses cut back as demand slows.

“The industries that experienced explosive growth during the pandemic are now cutting hours, jobs and that’s lowering wage pressures,” said Julia Pollak, chief economist at ZipRecruiter. She added that labor costs have been the highest for employers in low-skilled industries, mostly in the services sector, because of the difficulty hiring and retaining workers.

While wages paid to employees have shown some early signs of slowing, others still struggle with those higher labor costs while trying to meet demand.

“An insurance contact in Louisville reported rising wages cutting into their profit margins, and a home building contact in Little Rock reported margins being down 15-20% due to increased wages for employees,” the Fed’s most recent Beige Book report said.

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