Wage growth comes in hot ahead of Fed meeting

Another economic report, another sign that the economy is still too hot for the Fed’s liking.

The Fed’s main measure for tracking wage growth had its biggest quarterly jump in a year, while overall compensation rose more than anytime since 2022, the Labor Department reported Tuesday—just a day before the Fed is expected to leave rates at 5.33% for the next six weeks.

Compensation for private sector and civilian government workers grew 1.2% in the first three months of the year, the largest quarterly increase in the Employment Cost Index (ECI) since Q3 2022. A 1.1% increase for wages or salary alone, not counting benefits, was the largest since Q2 2022.

The 1.2% compensation jump—larger than the consensus estimates of economists surveyed by Bloomberg—“is just evidence that the inflation data, the wage growth data, is moving in the wrong direction to be consistent with their target,” Citigroup economist Robert Sockin told Bloomberg. The indicator follows three months in a row when the Core Consumer Price Index came in hotter than forecast.

The high ECI “will further erode [the Fed’s] confidence that inflation is declining toward the 2% target,” Bloomberg economist Estelle Ou told the outlet, “setting the stage for a relatively hawkish stance in the May 1 decision and news conference.”

Other indicators provide some hope that inflation is cooling. April’s average hourly wage is expected to show a year over year decline when the Labor Department releases monthly jobs data on Friday, Bloomberg reported, and the Atlanta Fed’s median pay tracker has continued trending downward since 2022. Looking at the ECI annually instead of quarterly also shows a much smoother, soothing decline since the fourth quarter of that year.