US wages rose at a solid pace this summer, posing challenge for Fed’s inflation fight

Wages and benefits grew at a slightly faster pace in the July-September quarter than the previous three months, a benefit for workers but a trend that also represents a risk to the Federal Reserve’s fight against inflation.

Compensation as measured by the Employment Cost Index increased 1.1% in the third quarter, down from a 1% rise in the April-June quarter, the Labor Department said Tuesday. Compared with a year ago, compensation growth slowed to 4.3% from 4.5% in the second quarter. Still, that is faster than the rate of inflation, suggesting Americans saw an increase in their purchasing power after pay trailed inflation for much of 2021 and 2022.

Fed officials consider the ECI one of the most important measures of wages and benefits because it measures how pay changes for the same mix of jobs, rather than average hourly pay, which can be pushed higher by widespread layoffs among lower-income workers, for example.

Growth in pay and benefits, as measured by the ECI, peaked at 5.1% last fall. While higher pay is good for workers, it can also fuel inflation if companies choose to pass on the higher labor costs in the form of higher prices. Companies can also accept lower profit margins or boost the efficiency of their workforce, which allows them to pay more without lifting prices.

Fed Chair Jerome Powell has indicated that pay increases at a pace of about 3.5% annually are consistent with the central bank’s 2% inflation target.

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