2024 First Quarter Labor Costs Surprise with Accelerated Compensation Growth: Implications for Inflation and Central Bankers

It wasn’t solely inflation heating up at the beginning of 2024; salaries did too. A widely monitored indicator on labor expenses revealed that compensation growth quickened faster than anticipated during the initial three months of this year, delivering additional encouraging news for employees’ paychecks yet posing a double-edged sword for central bankers seeking to identify potential inflation pressures easing off. The Employment Cost Index (ECI) increased by 1.2% on an adjusted seasonal basis in the first quarter, faster growth than the prior quarter’s 0.9%, according to data released Tuesday from the Bureau of Labor Statistics. On a yearly basis, the index that measures changes in wages and benefits was unchanged at 4.2% for the period ending March 31st. Economists had predicted quarterly expansion would come in at 0.9% and annual gains to decrease to 4%. US stocks dropped on this news, with Dow futures sliding approximately 185 points or roughly half a percent in pre-market trading Tuesday morning. Futures were lower by 0.43% for the S&P 500 and 0.46% for the Nasdaq Composite. The Federal Reserve closely observes the direction of wage increases, as there is worry that enhanced compensation growth may become an inflationary pressure point. Unlike other wage indicators, the Fed prefers the ECI because it provides a more comprehensive measurement of remuneration and encompasses not just wages but also benefits provided to workers. The index also includes controls for changes in employment composition, essentially measuring wage costs for identical jobs over time. This story is still developing and will be updated as new information becomes available.