Wage costs for workers rose more than expected at the start of the year, signaling a new danger signal of persistent inflation, while consumer confidence reached the lowest level in almost two years.
The labor cost index, which measures workers' wages and benefits, rose 1.2% in the first quarter, the Labor Department said Tuesday. That was up from 0.9% in the fourth quarter of 2023 and above the Dow Jones consensus estimate of a 1% increase.
In the bigger picture, the rise raised concerns that a series of 11 rate hikes by the Fed has not done enough to ease price pressures and will likely contribute to the central bank being put on hold before it can start easing of monetary policy.
The Fed considers the ECI an important measure of underlying inflation pressures.
The interest rate-setting Federal Open Market Committee begins its two-day meeting on Tuesday. Markets have priced in virtually no chance that the FOMC will change its overnight rate target from the current range of 5.25%-5.5%.
A separate report Tuesday showed the Conference Board's Consumer Confidence Index fell
After the release of the ECI index, traders changed their outlook for the first cut in September, raising the odds of a coin flip, according to CME Group's FedWatch measure of Fed Funds futures prices. The implied probability that there will be no cuts this year has also risen to around 23%, after being near zero a month ago.
On an annual basis, compensation costs for civilian workers rose 4.2%, still above a level the Fed says is in line with its 2% inflation target, though lower than the 4.8% a year ago. Wages and salaries increased by 4.4%, while benefit costs increased by 3.7%.
State and local government employees saw their compensation costs increase by 4.8%, a narrow decline from the same period in 2023. The larger increase was likely due to the high level of union membership in that group, causing compensation costs to rise 5.3%, compared to just a 3.9% gain for non-union workers.
The Conference Board's action brought yet another reminder of inflation concerns.
The Consumer Confidence Index fell to 97, down 6.1 points, below the Wall Street estimate of 103.5. Although the Present Situation Index also fell, it is still at a level that “more than offsets concerns about the future,” said Dana Peterson, the board's chief economist.
Responses to the survey showed that concerns about “higher price levels, especially for food and gas, dominated consumer concerns… with politics and global conflict taking a back seat,” Peterson added.