Wages and benefits for American workers rose quickly but more slowly in the last three months of 2022, the third straight decline, which may help the Federal Reserve that wage gains will not lead to higher inflation.
Wages and benefits, such as health insurance, rose 1% in the October-December quarter compared with the previous three months. That marked a solid gain, albeit slower than the 1.2% increase in the July-September quarter.
Fed Chairman Jerome Powell and economists consider the data released Tuesday, known as the labor cost index, to be the most comprehensive measure yet of labor costs. Powell last year cited rising indexes as the main reason why the Fed is accelerating interest rate hikes.
On Wednesday, Powell and his Fed colleagues will raise the benchmark interest rate by a quarter point to a range of 4.5% to 4.75%, the eighth rate hike. But as inflation has cooled, the central bank has increased rates in smaller increments. Last year, the Fed raised the key rate by three quarters of the four times.
Powell said he sees rapid wage increases, particularly in the labor-intensive service sector, as the biggest obstacle to reducing inflation to the Fed’s 2% target. When restaurants, hotels, veterinary clinics and other service companies raise salaries, they often pass on higher costs by charging customers higher prices.
Overall inflation continued to cool, falling to 6.5% in December compared to last year. That’s down from a 40-year high of 9.1% in June. However, Powell’s concern is that fast wage growth will push inflation to about 4% – still twice as high as the Fed’s target.
Workers’ wages have risen rapidly over the past two years. With labor shortages affecting various industries, many employers are constantly increasing wages and salaries, while offering more benefits, in an attempt to attract and retain employees. For most people, inflation still outpaces these salary gains. But rising wages have helped many consumers maintain spending despite higher prices.
In the first quarter of last year, total workers’ compensation rose 1.4% — the most on record since 2001.
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