U.S. labor cost growth smallest in a year

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. labor costs increased at their slowest pace in a year in the fourth quarter as wage growth slowed, giving the Federal Reserve a boost in its fight against inflation.

There was more encouraging news on inflation, with other data on Tuesday showing house price growth slowing considerably in November. The reports were published as Fed officials began a two-day policy meeting. The U.S. central bank is expected to raise its policy rate by 25 basis points on Wednesday, further scaling back the pace of its interest rate increases.

"The Fed's rate hikes in 2022 were successful at cooling an overheated economy," said Bill Adams, chief economist at Comerica Bank in Dallas. "But policymakers want to see a wider margin of slack open up to be confident that the slower inflation in late 2022 becomes the trend."

The Employment Cost Index, the broadest measure of labor costs, rose 1.0% last quarter, the Labor Department said. That was the smallest advance since the fourth quarter of 2021 and followed a 1.2% gain in the July-September period.

Economists polled by Reuters had forecast the ECI would rise 1.1%. Labor costs increased 5.1% on a year-on-year basis after climbing 5.0% in the third quarter. They remain higher than the 3.5% that Fed officials and economists view as consistent with tame inflation. The Fed has a 2% inflation target.

The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.

The Fed last year raised its policy rate by 425 basis points from a near-zero level to a 4.25%-4.50% range, the highest since late 2007. Though the central bank has shifted to smaller rate increases, it is unlikely to stop tightening monetary policy.

The Fed's "Beige Book" report this month described the labor market as "persistently tight," noting that "wage pressures remained elevated across districts" in early January, though five regional "Reserve Banks reported that these pressures had eased somewhat."

While annual growth in average hourly earnings in the Labor Department's monthly employment report has cooled, wages remain high. The Atlanta Fed's wage tracker also moderated, but stayed elevated in the fourth quarter.

Labor market tightness was underscored by a separate Conference Board report showing its consumer survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, increased to 36.9 in January from 34.5 in December.

This measure correlates to the unemployment rate from the Labor Department, and the rise was consistent with tight labor market conditions. The government will on Wednesday publish job openings data for December. There were 10.5 million job openings on the last business day of November.

Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury prices were mixed.


"Easing labor cost growth should not be conflated with benign labor cost growth," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina. "The labor market remains incredibly tight. While the deceleration in labor costs is a welcome development, it is too soon to declare that it will stay there for the long haul."

Wages and salaries increased 1.0% in the last quarter, also the smallest gain since the fourth quarter of 2021, after rising 1.3% in the third quarter. They were up 5.1% on a year-on-year basis after rising by the same margin in the prior quarter.

Private-sector wages rose 1.0%, slowing from a 1.2% advance in the third quarter. Private industry wages increased 5.1% on a year-on-year basis after rising 5.2% in the July-September quarter.

The moderation in wage growth was more pronounced in the leisure and hospitality sector, where wages and salaries gained 0.9% after increasing 1.8% in the third quarter. Employment in this industry remains below pre-pandemic levels.

But wages in the financial activities industry shot up as did those in wholesale trade. Construction wages rose solidly.

State and local government wages climbed 1.0% last quarter after surging 2.1% in the third quarter.

Higher inflation, however, continued to eat into consumers' purchasing power. Inflation-adjusted wages for all workers fell 1.2% on a year-on-year basis in the fourth quarter.

Benefits rose 0.8% last quarter after increasing 1.0% in the third quarter. They were up 4.9% on a year-on-year basis.

The Fed's rate-hiking cycle, the fastest since the 1980s, is dampening house price inflation. The S&P CoreLogic Case-Shiller national home price index, covering all nine U.S. census divisions, increased 7.7% on a year-on-year basis in November, pulling back from October's 9.2% gain.

House prices measured by the Federal Housing Finance Agency rose 8.2% in the 12 months through November after climbing 9.8% in October. A persistent shortage of homes for sale is, however, likely to prevent a sharp decline in house prices.

"A dearth of inventory, no forced selling and the back-off in mortgage rates are helping to contain the fallout," said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

Despite consumers' upbeat views of the labor market, they remained gripped by fears of a recession over the next six months, with many adopting a wait-and-see attitude toward big-ticket purchases. The Conference Board's consumer confidence index fell to 107.1 this month from 109.0 in December.

Consumers' 12-month inflation expectations rose to 6.8% from 6.6% last month.

"We project that a moderate recession will take hold by mid-year, although the downside for this downturn should be limited by solid financial fundamentals for most households and businesses," said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.

(This story has been corrected to change Case-Shiller house price increase to 7.7% instead of 9.2% in paragraph 22)

(Reporting by Lucia Mutikani; Editing by Andrew Heavens, Paul Simao and Andrea Ricci)