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U.S. Employment Costs Surge



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A key measure of the employment costs of Americans unexpectedly increased during the summer, raising concerns that the US economy may face a second round of inflation or that the Federal Reserve may need to apply more pressure to get inflation back to its target of two percent.

The Department of Labor's quarterly barometer of wages and benefits, the Employment Cost Index, increased by 1.1 percent in the third quarter of 2023 over the previous quarter. This was faster growth than the 1% increase seen in the previous quarter and exceeded the range of predictions in an Econoday survey.

That rate is significantly faster than most economists believe is necessary for price increases to reach the Fed's two percent target. The Employment Cost Index is a key indicator for Fed officials of inflationary pressures.

The index is up 4.3% from the third quarter of 2022, less than the 4.5 percent annual gain that was noted in the prior quarter.

Despite this, the index is currently running at a pace almost twice as fast as it did in the ten years before the pandemic when annual gains were on average 2.2 percent.

The labor market was predicted by many economists to slow down in the second half of the year. Rather, the number of claims for unemployment benefits has decreased and remained at that level. In addition, the fourth quarter saw an acceleration of the overall economic growth to an annual pace of 4.9 percent. Compared to expectations, U.S. consumer goods inflation increased by 0.4 percent in September, or 4.4 percent annually, according to the Commerce Department's personal consumption expenditure price index.

In theory, wage increases can benefit households, but in reality, rising costs frequently offset these gains as households use their increased income to drive up the cost of goods and services. The personal consumption price index increased by 3.4 percent in the year ending in September, giving workers a real gain of less than one percent. Prices increased by 0.7 percent for the quarter, giving workers a three-tenths of a point boost.

The consumer price index published by the Labor Department is one of the other inflation measures that has increased significantly in the last year. In the twelve months ending in September, the CPI increased by 3.7 percent. By this measure, then, wage gains were even more muted.

Fed officials are meeting this week to reassess monetary policy. They are widely expected to hold their benchmark target steady at a range of 5.25 percent to 5.5o percent. The markets are currently reflecting some uncertainty about how long the Fed will maintain high rates as well as whether or not the Fed will raise rates again at its final meeting of the year in December.

Pay and salaries for employees in the private sector increased by 1.2% from July to September and by 4.6% from the same period last year. Government employee wages increased by 1.8 percent from the previous quarter, despite generally falling short of private sector wages.

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