The Fed's key wage gauge slows to lowest level since 2021

REAL ECONOMY BLOG | January 31, 2024

Authored by RSM US LLP

The Employment Cost Index—the Fed’s key metric for wage growth that accounts for labor composition—slowed to the lowest level since June 2021, according to the Bureau of Labor Statistics on Wednesday.

The overall index eased to 0.9% in the fourth quarter on a seasonally adjusted basis, down from 1.1% in the previous quarter. That is equivalent to a 4.2% increase on a year-ago basis, down slightly from 4.3% previously.

The data was in line with our forecast and should reassure the Federal Reserve, which is meeting on Wednesday, that inflation pressures are easing.

In addition, benefit growth—a proxy for how tight the labor market is—grew by only 0.6% in the last quarter, down markedly from 0.8%. That suggested a more balanced labor market where firms had less incentive than before to provide their employees with extra compensation to retain them.

Given the encouraging data on inflation and wages, we are likely to see the Fed’s most dovish outlook in two years reflected in its statement and subsequent remarks by Chairman Jerome Powell on Wednesday.

The data supported our soft-landing call, as lower wage growth was coupled with robust GDP growth in the fourth quarter.

As inflation stayed near 3% on a year-ago basis, real wages continued to be positive for most of the market, boosting consumer sentiment and spending. In other words, rapid disinflation was a crucial factor that helped propel economic activities.

The takeaway

Still, wage growth remained above 4% according to the cost index and other indicators. This should not guarantee any rate cuts in January or March, although the likelihood of a rate cut in May, rather than June as in our base case, now appears to be increasing.