The level of wages and benefits closely watched by the Federal Reserve rose less than expected at the end of 2022, new data showed on Tuesday.
The Employment Cost Index The final quarter of 2022 rose 1 percent from the previous three months, slower than the 1.1 percent economists had expected and a slowdown from the previous 1.2 percent reading.
The data will reaffirm to central bankers that the economy and labor market are cooling, which should help inflation return to normal over time. While wage gains are still faster than normal, central bankers will adjust interest rates less aggressively than they did throughout 2022, helping to feel moderate.
The employment cost measure rose 5.1 percent on a year-over-year basis, close to the 5 percent reported in the previous quarter. In the pre-pandemic decade, the index averaged 2.2 percent annual gains, underscoring a continuation of today’s momentum. But the level of private-sector wages, not including benefits, is what economists see as a good indicator of labor market tightness. A bit slower.
Central bankers have been watching the labor market — particularly wages — closely to gauge how far they have to go in their campaign against stubbornly high inflation. While commodity price increases tied to supply chain slippages are starting to fade, central bankers worry that rapid wage gains could push up the costs of services faster. Labor is a major expense for service firms such as hotels and restaurants, and firms may pass higher labor costs on to customers at higher prices. Bigger wages will help sustain consumer demand and keep pressure on prices.
The central bank’s next interest rate decision will be announced on Wednesday. Central bankers are widely expected to raise rates by a quarter of a percentage point for most of 2022, after raising rates by three-quarters of a point at their last meeting in December and half a point at their last meeting in December.
The new adjustment will raise rates from 4.5 to 4.75 percent. The question now is how many more moves the Fed will make — and how long policymakers will keep interest rates high.
Steep borrowing costs prevent consumers from making large purchases and expanding businesses, slowing the economy and weakening the labor market. Fed officials believe they can cool the economy enough to allow supply and demand to return to balance — moderating inflation — without triggering a punishing recession. But they have made it clear that they are willing to take some pains to bring inflation back under control.
And they underscored that they think the labor market needs to slow down to get inflation on a more sustainable path.
“We want strong wage increases,” said Fed President Jerome H. Powell said His last press conference In December. Referring to the central bank’s target inflation rate, he said, “We want them to be consistent with 2 percent inflation.
For now, the United States Inflation rate Very fast, at 5 percent.
After the Fed’s rate decision was released at 2pm ET on Wednesday, Mr. Powell will deliver another news conference.
