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U.S. employment costs accelerate in first quarter, adding to inflation worries

The numbers: The U.S. employment cost index rose 1.4% in the first quarter, up from a 1% gain in the October-December quarter, the Labor Department said Friday. Economists polled by the Wall Street Journal had forecast a 1.1% increase.

The increase in compensation gains over the past year rose to 4.5% from 4%.

Key details: Wages for private industry workers accelerated to a 1.3% gain in the first quarter, up from 1.1% in the prior three months. Year-over-year, wages are up 5% in the quarter, the same pace as in the fourth quarter.

Overall wages and salaries rose 1.2% after advancing 1% in the fourth quarter. They make up about 70% of employment costs. Over the past year, wages rose at a 4.7% rate, up from 4.5% in the last quarter of 2021. That’s the highest annual wage gain since the third quarter of 1985.

Welfare benefits jumped 1.8% in the January-March quarter after a 0.9% gain in the prior quarter . They account for the rest of worker compensation.  Year on year- benefits are up 4.1%, much higher than the 2.8% rate in the prior quarter. This is the fastest rate since the fourth quarter of 2005.

Big picture: The acceleration in wages won’t provide any relief for economists worried about “too tight” labor markets, said Richard Moody, chief economist at Regions Financial. Economists view the employment cost index as a best gauge of labor costs. Rising wages and benefits are one of the factors companies say are leading them to raise their prices. Some economists are worried about a wage price spiral that will keep inflation pressures firm, if not rising, from the 40 year high of 8.5% annual rate in March. 

What are they saying? “With the labor market tightening to an “unhealthy level” in [Fed] Chair Powell’s words, the ECI data endorse our view that the FOMC will proceed with consecutive 50bp rate hikes at both the May and June policy meetings. However, we expect labor supply to improve gradually over the course of 2022 as Covid-related constraints continue to unwind, putting downward pressure on wages, particularly in the second half of the year,” said Mahir Rasheed, U.S. economist at Oxford Economics.

Market reaction: U.S. stocks


were down sharply on Friday on back of fresh inflation data and disappointing Amazon

results . The yield on the 10-year Treasury note

moved higher after the wage data was released.

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