Wage growth has been moderating for the last 2 quarters, according to today’s Employment Cost Index report from the BLS. Wages and salaries grew at 1.0% in the last quarter of 2022, below expectations, which brings year-over-year wage growth to 5.1%.
Over the past two quarters, wages have grown at an annualized rate of 4.4%. It’s a move in the right direction, right at the top of the 3%-4% pace that economists believe is consistent with the Fed’s 2% inflation target. Coming on the heels of last week’s stronger than expected GDP figure, today’s wage numbers put the Fed one step closer to a 25 bp interest rate increase decision tomorrow. It will be the 8th hike in a row, smaller than the previous rate hikes but far from the pause that markets are hoping for.
Nonetheless, slowing wage growth is a welcome sign that the economy may avoid the wage-price spiral that the Fed feared most.
Here are some highlights of today’s report:
- Inflation moderated more than wage growth: The recent slowdown in inflation has been larger than the slowdown in wage growth, bringing real wage growth to 1.0% in Q4, following a 1.2% increase in Q3. This is good news for employees since it increases the purchasing power of their paychecks. But it is a concern for the Fed since it might increase consumer spending after a brief decline in the last two months, potentially putting upward pressure on prices again.
- The slowdown in wages is much more pronounced in inflation-sensitive industries: The quarterly rate of wage growth slowed more significantly in industries that are disproportionately affected by softer consumer demand. Wage growth in retail trade, leisure and hospitality, and professional and business services declined substantially in the second half of 2022.
- Service-providing industries pulled back on employee benefits: Companies are resorting to a variety of cost-cutting measures as fears of a potential recession mount. Many are applying the brakes to benefit costs more firmly than to wage costs. The cost to employers of total employee benefits increased only 0.8% in the service-producing sector in the last quarter of 2022, declining 3 consecutive quarters.
