The first quarter of 2024 saw employee compensation rise by 1.2%, indicated by the Employment Cost Index (ECI) - an increase from the previous quarter in 2023. The Bureau of Labor Statistics revealed that these figures have exceeded the 1.0% expected by economists surveyed by the Wall Street Journal and Dow Jones Newswire.
While this might seem beneficial for employees, it is proving to be a challenge for the Federal Reserve's ongoing attempts to curb inflation. Sarah House and Michael Pugliese, economists at Wells Fargo, suggested that this may indicate an impending halt in slowing inflation which began a year ago.
The general consensus among economists indicates that inflation continues to pose an obstacle for Federal Reserve officials who are attempting to reduce it from its current figure of 2.7%. This is because increased wages may lead to inflation as businesses hike up the prices of goods and services to accommodate increased employment costs.
Although wage growth and inflation are expected to slow down throughout the year, Oxford Economics' Nancy Vanden Houten opines that the Fed officials will require several months of positive data on these metrics to regain confidence in managing inflation down to a sustainable 2%.
The Federal Open Market Committee (FOMC), the Federal Reserve's monetary policy committee, is meeting this week and is anticipated to maintain interest rates. Meanwhile, investors have already recalibrated their expectations for an interest rate cut to later in the year, as Fed officials have announced their intent to closely monitor data on wages, inflation, and economic growth.
BMO Economics' senior economist Jay Hawkins supports the ECI acceleration and believes it underlines the necessity for the Fed to postpone changes until September. He states that it supports the argument that the final stage of reducing inflation will be slow and irregular.