A closely watched wage growth gauge hit its highest level in a year during the first quarter, raising concerns that sticky inflation may be widespread and prompt the Federal Reserve to keep interest rates steady for longer than initially hoped.
New data released Tuesday from the Bureau of Labor Statistics showed that compensation costs rose 1.2% in the first quarter, above the previous quarter’s 1% increase and higher than the 0.9% economists had expected, according to Bloomberg data.
Capital Economics chief North America economist Paul Ashworth said Tuesday’s data showed wage growth is also “sticky,” not just recent inflation data that has shown price increases are not falling at the rate many hoped.
“The persistence of wage growth is another reason the Fed is taking its time on rate cuts,” Ashworth wrote in a note after the release.
Markets moved after the print, with the 10-year Treasury yield (^TNX) adding about six basis points to reach 4.67% immediately following the release of the Employment Cost Index (ECI), while all futures tied to the three major averages lower.
Wells Fargo senior economist Sarah House reasoned that, all things being equal, Tuesday’s increase in labor costs is not “the end of the world” for the Fed. But it’s another drop in the bucket weighing on the market’s hopes for rate cuts ahead of Federal Reserve Chairman Jerome Powell’s next update on monetary policy, scheduled for Wednesday afternoon.
“It’s another data point suggesting that the inflation slowdown that began this time last year stalled in the first quarter of 2024,” House wrote in a research note after the release.
Tuesday’s Employment Cost Index data adds to the ongoing conversation about whether sticky wage growth is contributing to persistently high inflation. Recent data from ADP showed that wage growth for private market job changers has picked up in recent months, while growth for job holders has been little changed, a trend that ADP chief economist Nela Richardson said Wednesday suggests a “challenge” for the Fed.
Meanwhile, data from the Bureau of Labor Statistics revealed that year-over-year wage growth has shown some signs of cooling, but is still considered far too high for inflation to return to the Fed’s 2% target, according to economists.
New data on Friday showed that the core index of personal consumption expenditures (PCE), which strips out food and energy costs and is closely watched by the Federal Reserve, rose 2.8% from a year earlier in March, above estimates for 2 .7% and unchanged from the annual increase in February.
Through the first three months of the year, core PCE rose at an annual pace of 4.4%, a “concerning” trend, according to Nationwide senior economist Ben Ayers.
This came after Fed Chairman Jerome Powell had already noted that the latest inflation data has not shown progress on rate hikes that the central bank had hoped to see entering 2024.
“We have said at the FOMC that we need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy,” Powell said on April 16, ahead of the release of the March PCE- the data.
“Clearly the latest data has not given us greater confidence and instead indicates that it will likely take longer than expected to gain that confidence.”
Powell’s comments added to investors’ waning rate-cut hopes for 2024. Ahead of Wednesday’s Fed press conference, markets are pricing in close to one rate cut this year, down from the nearly seven seen in early January, according to Bloomberg data.
This has sent Treasury yields skyrocketing, creating headwinds for the stocks that made the S&P 500 first negative month since October. Morgan Stanley chief investment officer Mike Wilson reasoned that higher interest rates are likely to weigh on stocks “unless Powell surprises on the dovish side at this week’s Fed meeting.”
But given Tuesday’s reading from the employment cost index, on top of the rest of the data, economists don’t see a dovish Powell as the likely outcome on Wednesday.
“There’s not much for the Fed to hang its hat on in terms of the latest inflation data,” Deutsche Bank’s U.S. economist Brett Ryan told Yahoo Finance on Tuesday.
He added that Powell’s message on Wednesday is likely to be that “increased inflation would be met with keeping interest rates steady.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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