US labor cost growth is the smallest in a year

WASHINGTON (Reuters) – U.S. labor costs rose at their slowest pace in a year in the fourth quarter as wage growth slowed, giving the Federal Reserve a boost in its fight against inflation.

There was more encouraging news on inflation, as other data on Tuesday showed house price growth slowed significantly in November. The reports were released as Federal Reserve officials kicked off a two-day policy meeting. The US central bank is expected to raise interest rates by 25 basis points on Wednesday, reducing the pace of interest rate increases.

“The Fed’s interest rate increases in 2022 have calmed an overheating economy,” said Bill Adams, chief economist at Bank of Comerica in Dallas. “But policymakers want to see a wider margin of recession open up to be confident that slower inflation in late 2022 becomes the trend.”

The Labor Department said its labor cost index, the broadest measure of labor costs, rose 1.0% in the most recent quarter. It was the smallest advance since the last quarter of 2021 and followed a 1.2% rise in the July-September period.

Economists polled by Reuters had expected the index to rise 1.1 percent. Labor costs rose 5.1% year over year after rising 5.0% in the third quarter. It’s still above the 3.5% that Fed officials and economists consider consistent with moderate inflation. The Fed has an inflation target of 2%.

Policymakers view the ECI as one of the best measures of labor market stagnation and an indicator of core inflation because it adjusts for changes in composition and job quality.

The Fed raised its policy rate last year by 425 basis points from a near-zero level to a range of 4.25%-4.50%, the highest level since late 2007. Despite the central bank’s shift to smaller rate hikes, it is unlikely that Stop tightening monetary policy.

The Fed’s “Beige Book” report this month described the labor market as “consistently tight,” noting that “wage pressures remained elevated across regions” in early January, though five regional reserve banks reported that those pressures had eased. To some extent.

While annual growth in average hourly earnings in the Labor Department’s monthly employment report has slowed, wages remain high. The Atlanta Fed payroll tracker also eased, but remained elevated in the fourth quarter.

The tightness of the labor market was underscored by a separate Conference Board report showing the so-called labor market differential in a consumer survey, drawn from data on respondents’ opinions of whether jobs are plentiful or hard to come by, rose to 36.9 in January from 34.5 in December.

This metric correlates with the unemployment rate from the Department of Labor, and the rise was consistent with tightening labor market conditions. On Wednesday, the government will publish employment data for December. There were 10.5 million jobs on the last business day of November.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices were mixed.

Cool home prices

“Modifying labor cost growth should not be confused with benign growth in labor cost,” said Sarah House, chief economist at Wells Fargo in Charlotte, North Carolina. “The labor market remains incredibly tight. While the slowdown in labor costs is a welcome development, it is too early to announce that it will be there for long.”

Wages and salaries increased 1.0% in the last quarter, also the smallest rise since the fourth quarter of 2021, after rising 1.3% in the third quarter. They rose 5.1% year over year after rising by the same margin in the previous quarter.

Private sector wages rose 1.0%, slowing from a 1.2% rise in the third quarter. Private industry wages increased 5.1% year-over-year after rising 5.2% in the July-September quarter.

The moderation in wage growth was most evident in the leisure and hospitality sector, where wages and salaries rose 0.9% after a 1.8% increase in the third quarter. Employment in this industry remains below pre-pandemic levels.

But wages in the financial industry rose, as did in wholesale trade. Construction wages skyrocketed.

State and local government wages rose 1.0% in the latest quarter after rising 2.1% in the third quarter.

However, rising inflation continued to erode consumers’ purchasing power. Inflation-adjusted wages for all workers fell 1.2% year over year in the fourth quarter.

Interest rose 0.8% in the most recent quarter after a 1.0% increase in the third quarter. It increased by 4.9% year on year.

The Fed’s rate-raising cycle, the fastest since the 1980s, is dampening house price inflation. The S&P CoreLogic Case-Shiller National Home Price Index, which covers all nine US census boroughs, rose 7.7% year over year in November, reversing October’s gain of 9.2%.

Home prices, as measured by the Federal Housing Finance Agency, rose 8.2% in the 12 months through November after rising 9.8% in October. However, an ongoing shortage of homes for sale is likely to prevent a sharp drop in home prices.

“Scarcity of inventory, non-forced selling, and declining mortgage rates are helping contain the fallout,” said Robert Cavitch, chief economist at BMO Capital Markets in Toronto.

Despite consumers’ optimistic views on the job market, they were still hemmed in by fears of a recession over the next six months, with many adopting a wait-and-see attitude towards big-ticket purchases. The Conference Board’s consumer confidence index fell to 107.1 this month from 109.0 in December.

Consumer expectations for 12-month inflation rose to 6.8% from 6.6% last month.

“We expect a moderate recession by the middle of the year, although the downside of this downturn should be limited by strong financial fundamentals for most households and businesses,” said Ben Ayers, chief economist at Nationwide in Columbus, Ohio.

(This story has been corrected to change the Case-Shiller home price increase to 7.7%, instead of 9.2%, in paragraph 22)

(Reporting by Lucia Mutecani) Editing by Andrew Heavens, Paul Simao and Andrea Ricci

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