U.S. labor cost growth smallest in a year; labor persistently tight

WASHINGTON, Jan 31 (Reuters) – U.S. labor prices elevated at their slowest tempo in a 12 months in the fourth quarter as wage growth slowed, giving the Federal Reserve a increase in its combat towards inflation.

There was extra encouraging information on inflation, with different knowledge on Tuesday displaying home worth growth slowing significantly in November. The reviews had been revealed as Fed officers started a two-day coverage assembly. The U.S. central financial institution is anticipated to lift its coverage fee by 25 foundation factors on Wednesday, additional scaling again the tempo of its rate of interest will increase.

“The Fed’s fee hikes in 2022 had been profitable at cooling an overheated financial system,” mentioned Bill Adams, chief economist at Comerica Bank in Dallas. “But policymakers wish to see a wider margin of slack divulge heart’s contents to be assured that the slower inflation in late 2022 turns into the development.”

The Employment Cost Index, the broadest measure of labor prices, rose 1.0% final quarter, the Labor Department mentioned. That was the smallest advance because the fourth quarter of 2021 and adopted a 1.2% acquire in the July-September interval.

Economists polled by Reuters had forecast the ECI would rise 1.1%. Labor prices elevated 5.1% on a year-on-year foundation after climbing 5.0% in the third quarter. They stay increased than the three.5% that Fed officers and economists view as in step with tame inflation. The Fed has a 2% inflation goal.

The ECI is seen by policymakers as one of many higher measures of labor market slack and a predictor of core inflation as a result of it adjusts for composition and job-quality adjustments.

The Fed final 12 months raised its coverage fee by 425 foundation factors from a near-zero stage to a 4.25%-4.50% vary, the best since late 2007. Though the central financial institution has shifted to smaller fee will increase, it’s unlikely to cease tightening financial coverage.

The Fed’s “Beige Book” report this month described the labor market as “persistently tight,” noting that “wage pressures remained elevated throughout districts” in early January, although 5 regional “Reserve Banks reported that these pressures had eased considerably.”

While annual growth in common hourly earnings in the Labor Department’s month-to-month employment report has cooled, wages stay excessive. The Atlanta Fed’s wage tracker additionally moderated, however stayed elevated in the fourth quarter.

Labor market tightness was underscored by a separate Conference Board report displaying its shopper survey’s so-called labor market differential, derived from knowledge on respondents’ views on whether or not jobs are plentiful or laborious to get, elevated to 36.9 in January from 34.5 in December.

This measure correlates to the unemployment fee from the Labor Department, and the rise was in step with tight labor market circumstances. The authorities will on Wednesday publish job openings knowledge for December. There had been 10.5 million job openings on the final enterprise day of November.

Stocks on Wall Street had been buying and selling increased. The greenback slipped towards a basket of currencies. U.S. Treasury costs had been combined.

HOUSE PRICES COOLING

“Easing labor cost growth shouldn’t be conflated with benign labor cost growth,” mentioned Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina. “The labor market stays extremely tight. While the deceleration in labor prices is a welcome improvement, it’s too quickly to declare that it’s going to keep there for the lengthy haul.”

Wages and salaries elevated 1.0% in the final quarter, additionally the smallest acquire because the fourth quarter of 2021, after rising 1.3% in the third quarter. They had been up 5.1% on a year-on-year foundation after rising by the identical margin in the prior quarter.

Private-sector wages rose 1.0%, slowing from a 1.2% advance in the third quarter. Private business wages elevated 5.1% on a year-on-year foundation after rising 5.2% in the July-September quarter.

The moderation in wage growth was extra pronounced in the leisure and hospitality sector, the place wages and salaries gained 0.9% after growing 1.8% in the third quarter. Employment in this business stays beneath pre-pandemic ranges.

But wages in the monetary actions business shot up as did these in wholesale commerce. Construction wages rose solidly.

State and native authorities wages climbed 1.0% final quarter after surging 2.1% in the third quarter.

Higher inflation, nonetheless, continued to eat into shoppers’ buying energy. Inflation-adjusted wages for all employees fell 1.2% on a year-on-year foundation in the fourth quarter.

Benefits rose 0.8% final quarter after growing 1.0% in the third quarter. They had been up 4.9% on a year-on-year foundation.

The Fed’s rate-hiking cycle, the quickest because the Nineteen Eighties, is dampening home worth inflation. The S&P CoreLogic Case-Shiller nationwide house worth index, masking all 9 U.S. census divisions, elevated 9.2% on a year-on-year foundation in November, pulling again from October’s 10.7% acquire.

House costs measured by the Federal Housing Finance Agency rose 8.2% in the 12 months via November after climbing 9.8% in October. A persistent scarcity of properties on the market is, nonetheless, more likely to forestall a sharp decline in home costs.

“A dearth of stock, no pressured promoting and the back-off in mortgage charges are serving to to include the fallout,” mentioned Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

Despite shoppers’ upbeat views of the labor market, they remained gripped by fears of a recession over the following six months, with many adopting a wait-and-see perspective towards big-ticket purchases. The Conference Board’s shopper confidence index fell to 107.1 this month from 109.0 in December.

Consumers’ 12-month inflation expectations rose to six.8% from 6.6% final month.

“We venture that a reasonable recession will take maintain by mid-year, though the draw back for this downturn must be restricted by stable monetary fundamentals for many households and companies,” mentioned Ben Ayers, senior economist at Nationwide in Columbus, Ohio.

Reporting by Lucia Mutikani; Editing by Andrew Heavens, Paul Simao and Andrea Ricci

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