Workers Keep Getting Big Raises. That’s a Problem for the Fed.
Wage and benefits increases have eased but remain strong as central bank officials tackle high inflation.
American workers are still commanding beefy pay raises. That is good news for workers but something that could complicate the Federal Reserve’s inflation fight.
Fed officials are likely to hold interest rates steady at this week’s policy meeting Tuesday and Wednesday, but signs of stalled progress in slowing wage and price increases could open the door to another rate increase in the coming months.
They will closely parse a Labor Department report scheduled to be released Tuesday that will show how fast worker compensation rose in the third quarter. Officials want to see such gains ebb to a pace that would allow inflation to decline over time to the Fed’s 2% target.
Overall compensation trends
Economists surveyed by The Wall Street Journal estimate that the department’s employment-cost index, a measure of wages and benefits, rose 1% last quarter from the prior three months, the same as in the second quarter. That would be a sign that compensation pressures didn’t cool in the third quarter as economic growth accelerated.
Employers spent 4.5% more on wages and benefits in the second quarter than the same period of 2022, according to the Labor Department.
That was slower than the recent peak increase of 5.1% reached in the second quarter of 2022 from a year earlier, but still well above the 2.7% rise in the fourth quarter of 2019 from the prior year, before the pandemic hit.
Wage gains ease
Another key measure shows wage gains are slowing. Average hourly earnings rose at a 3.4% three-month annualized pace in September, easing toward its prepandemic trend.
Fed officials are likely to see 3.5% annual wage growth as consistent with inflation between 2% and 2.5%, assuming productivity grows around 1% to 1.5% a year.
Compensation trends differ
Compensation increases differ depending on where workers live. Gains in wages and benefits have cooled in the Phoenix and Houston metro areas as pandemic-driven population growth subsided in those areas.
Workers in the New York area have seen fairly steady gains so far this year, though their compensation rose less than during the pandemic rebound.
Compensation trends vary by industry as well. Gains at restaurants, bars and retailers have slowed after peaking in early 2022 as employers rushed to hire enough to keep up with customer demand.
Nursing compensation jumped, as many nurses left the profession or retired during the pandemic, and the rate of increase remains elevated. The pace of wage and benefits gains in education has held fairly steady as schools returned to normal schedules.
Write to Gwynn Guilford at gwynn.guilford@wsj.com
