The Labor Department’s latest report revealed a higher-than-expected increase in Employee Compensation Costs (ECI) in the first quarter of 2024, signaling a persistent threat of inflation. The ECI, which measures worker salaries and benefits, jumped by 1.2% during this period, surpassing the 0.9% increase in the fourth quarter of 2023 and exceeding the Dow Jones consensus estimate of 1%. This significant gain has raised concerns that the Federal Reserve’s series of 11 interest rate hikes may not have adequately curbed price pressures, compelling the central bank to maintain its cautious stance on monetary policy easing.
The ECI is closely monitored by the Fed as a key indicator of underlying inflationary pressures. With the Federal Open Market Committee (FOMC) commencing a two-day meeting, markets had anticipated no alterations to the target for the overnight borrowing rate, which currently stands within the range of 5.25%-5.5%. However, following the ECI report, traders have reassessed their outlook, assigning nearly equal odds to the possibility of a rate cut in September. The implied probability of no rate cuts this year has also risen to approximately 23%, a noticeable increase from the near-zero levels observed just a month prior.
On an annualized basis, compensation costs for civilian workers have risen by 4.2%, still exceeding the Fed’s target inflation rate of 2%. This marks a slight decrease from the 4.8% increase recorded a year ago. Wages and salaries have risen by 4.4%, while benefits costs have increased by 3.7%. Notably, compensation costs for state and local government workers have climbed by 4.8%, a marginal decline from the corresponding period in 2023. This elevated increase may be attributed to the high unionization rate among these workers, whose compensation costs have grown by 5.3% compared to a 3.9% gain for nonunion workers.
