A closely watched gauge of wage growth rose to its highest level in a year during the first quarter, fueling fears that persistent inflation could run rampant and prompt the Federal Reserve to keep interest rates steady for longer than initially planned.
New data released Tuesday by the Bureau of Labor Statistics showed that compensation costs rose 1.2% in the first quarter, more than the previous quarter’s 1% increase and more than the 0.9% expected by economists, according to Bloomberg data.
Capital Economics’ chief North America economist Paul Ashworth said Tuesday’s data shows wage growth is “also persistent,” not just recent inflation data that showed that price increases are not decreasing at the pace many had hoped.
“The persistence of wage growth is another reason why the Fed is taking its time in cutting rates,” Ashworth wrote in a note following the release.
Markets moved after the release, with the 10-year Treasury yield (^TNX) adding about six basis points to 4.67% immediately following the release of the Employment Cost Index (ECI), while all futures linked to the three major averages fell.
Sarah House, senior economist at Wells Fargo, said that, all things being equal, Tuesday’s rise in labor costs is not “the end of the world” for the Fed. But it’s another drop in the ocean that weighs on the market’s hopes for lower interest rates ahead of Federal Reserve Chairman Jerome Powell’s next monetary policy update, scheduled for Wednesday. afternoon.
“This is another data point that suggests the slowdown in inflation that began this time last year has stopped in the first quarter of 2024,” House wrote in a research note following publication.
Tuesday’s data from the Employment Cost Index adds to the ongoing discussion over whether strong wage growth is contributing to persistently high inflation. Recent data from ADP showed that wage growth for people changing jobs in the private market has accelerated in recent months, while growth for workers who remain in employment has changed little, a trend which ADP chief economist Nela Richardson said poses a “challenge” to the Fed on Wednesday.
At the same time, data from the Bureau of Labor Statistics found that year-over-year wage growth has shown some signs of slowing, but is still considered far too high for inflation returns to the Fed’s 2% target, economists say.
New data released Friday showed that the core personal consumption expenditures (PCE) index, which does not take into account the cost of food and energy and is closely monitored by the Federal Reserve, increased by 2.8% YoY in March, above estimates of 2.7% and unchanged. compared to the annual increase observed in February.
In the first three months of the year, core PCE grew at an annualized rate of 4.4%, a “concerning” trend, according to Ben Ayers, Nationwide’s senior economist.
This came after Fed Chairman Jerome Powell previously noted that recent inflation data did not show the progress on price increases that the central bank had hoped for in 2024.
“We told the FOMC that we need to have greater confidence that inflation is moving sustainably toward 2% before it is appropriate to ease policy,” Powell said April 16, ahead of publication March PCE data.
“Recent data has clearly not given us greater confidence and instead indicates that it will likely take longer than expected to achieve that confidence.”
Powell’s comments helped dampen investors’ hopes for an interest rate cut in 2024. Heading into Wednesday’s Fed news conference, markets were pricing in close to a rate cut. interest this year, compared to seven observed in early January, according to Bloomberg data.
This sent Treasury yields soaring, creating a headwind for stocks that prompted the S&P 500 to first negative month since October. Mike Wilson, Morgan Stanley’s chief investment officer, said higher yields are likely to weigh on stocks “unless Powell is dovish at this week’s Fed meeting.”
But given Tuesday’s reading of the employment cost index, in addition to the rest of the data, economists don’t see a dovish Powell as a likely outcome on Wednesday.
“The Fed doesn’t have much to hang on to in terms of recent inflation data,” Deutsche Bank U.S. economist Brett Ryan told Yahoo Finance on Tuesday.
He added that Powell’s message on Wednesday would likely be that “high inflation would be offset by keeping rates stable.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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