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U.S. labor costs increased slightly less than expected in the third quarter as a softening labor market curbed wage growth, which bodes well for the inflation outlook.
The report from the Labor Department on Wednesday followed on the heels of data on Tuesday showing resignations dropped to a five-year low in October. That data supported views by Federal Reserve officials that the labor market was not a source of inflation. The labor market is easing amid low supply and demand for workers, which economists blame on reduced immigration and import tariffs. Import duties have boosted prices of some goods.
The U.S. central bank cut its benchmark overnight interest rate by another 25 basis points to the 3.50%-3.75% range on Wednesday, but officials signaled they could likely pause further rate reductions while seeking clearer signals about the direction of the labor market and inflation, which they said “remains somewhat elevated.”
The Fed has lowered borrowing costs three times this year.
“With the quits rate dropping and demand for workers fading in the second half of 2025, we expect wage growth to recede further in 2026,” said Ben Ayers, senior economist at Nationwide. “The reduced pressure from wage costs should be welcomed by firms and could help to drive improved business investment in the new year.”
The Employment Cost Index (ECI), the broadest measure of labor costs, rose 0.8% in the last quarter, after gaining 0.9% in the second quarter, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the ECI would advance 0.9%.
Labor costs increased 3.5% in the 12 months through September, the smallest year-on-year gain since the second quarter of 2021, after rising 3.6% in the year through June. The report was delayed by the 43-day government shutdown, and the BLS noted that “survey response rates decreased in September.”
Data collection had not been completed before the longest shutdown in U.S. history, the agency said.
“This may indicate that these results could experience higher revisions than usual,” said Eugenio Aleman, chief economist at Raymond James. “Nevertheless, this is good news … because these numbers reinforce the Fed chairman’s argument over the last year that labor costs, so far, are not behind the recent increase in inflation.”
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.
While the moderation suggested wages posed no threat to inflation, price pressures remain elevated partly because of tariffs, eroding consumers’ buying power. Cooler wage growth could also hamper consumer spending.
Stocks on Wall Street were trading mostly higher. The dollar eased against a basket of currencies. U.S. Treasury yields fell.
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Wages and salaries, which account for the bulk of labor costs, rose 0.8% last quarter after increasing 1.0% in the April-June quarter. They increased 3.5% on an annual basis. When adjusted for inflation, overall wages rose 0.6% in the 12 months through September after advancing 0.9% in the second quarter.
“There is nothing wrong here from the Fed’s point of view, although workers might be grumpy at slow real wage gains,” said Carl Weinberg, chief economist at High Frequency Economics. “These data support its assertion that labor costs are not contributing to inflation risks at this time.”
Growth in compensation for unionized workers slowed considerably last quarter. Private-sector wages and salaries gained 0.8% in the July-September quarter. They increased 3.6% in the 12 months through September after rising 3.5% in the second quarter.Â
The moderation in quarterly wage growth was led by the services sector, where salaries rose 0.7% after increasing 1.0% in the second quarter. Wages in the goods-producing industries increased 1.0%, matching the prior quarter’s advance.
State and local government wages rose 0.7% in the third quarter after increasing 0.9% in the April-June quarter. They increased 3.5% in the 12 months through September, slowing from 3.9% year-on-year growth in the second quarter.
Benefit costs for all workers advanced 0.8%. That increase followed a 0.7% rise in the second quarter. They increased 3.5% in the 12 months through September after rising by the same margin in the second quarter.
“Compensation costs will rise at a slower pace in the coming quarters,” said Matthew Martin, senior economist at Oxford Economics. “Workers have less confidence in testing the labor market.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Nick Zieminski, Andrea Ricci and Paul Simao)
