US labor costs increased moderately in the third quarter amid a slowdown in wage growth, suggesting that the labor market was unlikely to be an inflation risk.
The economy is struggling with rising price pressures, mostly stemming from the ongoing US-Israeli war with Iran, which has raised the cost of energy goods and fertilizers, as well as an AI investment boom. The Federal Reserve on Wednesday left its benchmark overnight interest rate in the 3.75%-4.00% range while acknowledging that inflation “remains elevated.” Economists expect the US central bank to raise borrowing costs in December.
“Labor-cost inflation continues to move in the right direction,” said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets. “While consumer inflation remains elevated, the Fed will take some comfort from the fact that the labor market is no longer a significant source of price pressures.”
The Employment Cost Index (ECI), the broadest measure of labor costs, rose 0.8% last quarter after increasing 0.9% in the April-June period, the Labor Department’s Bureau of Labor Statistics said on Friday. The increase in the ECI was in line with economists’ expectations.
Labor costs advanced 3.4% in the 12 months through September after rising by the same margin in the year through June. 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 changes in job quality.
Wages and salaries, which account for the bulk of labor costs, climbed 0.7% last quarter after rising 0.9% in the second quarter. In the 12 months through September, wages increased 3.1%, mostly lagging inflation. They had advanced 3.2% in the year through June.
The government reported on Thursday that the Personal Consumption Expenditures price index shot up 3.6% year-on-year in September. Core PCE inflation, which excludes the volatile food and energy components, increased 3.1% on a year-on-year basis in September. These two measures are tracked by the Fed for its 2% inflation target.
Inflation-Adjusted Wages Fall Again
The BLS report showed wages adjusted for inflation dropped 0.6% in the 12 months through September after declining 0.3% in the year through June. Economists said this underscored what they called a cost of living crisis that was depressing consumer sentiment and tanking President Donald Trump’s approval rating.
“Paychecks are barely able to keep workers’ heads above water, trying to scratch out a living,” said Christopher Rupkey, chief economist at FWDBONDS. “Bringing home a real paycheck that matches inflation is next to impossible for most Americans. No wonder consumer confidence remains on the low side of life.”
The labor market has been mostly stable this year, anchored by historically low layoffs. Hiring has been lackluster, accounting for some of the moderation in wage gains.
Private sector wages and salaries rose 0.8% in the third quarter after increasing 0.9% in the prior quarter. They advanced 3.1% in the year through September. Public sector wages climbed 0.6% last quarter after gaining 0.9% in the April-June period. They advanced 3.2% in the 12 months through September.
Benefits for all employees increased 0.9% after rising 1.0% in the second quarter. They were curbed by the public sector, where growth in benefits retreated to 0.7% after increasing 1.1% in the April-June quarter. Private sector benefits rose 0.9%, matching the second quarter’s gain. Overall benefits increased 3.9% over the year through September.
“Health insurance costs are running at their fastest clip since 2005,” said Matthew Martin, senior US economist at Oxford Economics. “From the perspective of private workers, a shift toward higher benefit growth and lower wage growth speeds up growth in total paychecks but slows growth in take-home pay.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
