Employment Cost Index Q4 2024

Labor market is not currently a source of inflationary pressures

• A balanced labor market along with wage growth compression efforts by employers led to a moderate 0.9% gain in the Employment Cost Index (ECI) in Q4 – in line with the 0.9% average gain over the prior four quarters. Wages and salaries also gained 0.9% – smaller than the 1.0% average gain over the prior four quarters – while benefits increased 0.8%.
  
  
• The all-important private sector wages and salaries gauge rose a moderate 0.9% in line with the average gain over the prior four quarters, but a tick more than the 0.8% advance in Q3, which was the smallest gain since Q3.
  
  
• Encouragingly, headline ECI compensation eased 0.1 percentage points (ppt) to 3.8% – the slowest pace since Q3 2021 – while private sector wage growth fell 0.1ppt to 3.7% year over year (y/y) – the slowest pace since Q2 2021.
  
  
• A rebalanced labor market means that ECI compensation and private sector wage growth will converge toward 3.5% over the next 12 months, which is below the pace consistent with the Fed’s 2% inflation given productivity growth around 2.7% (2+2.7= 4.7%). 
  
  
• Our conversations with business executives indicate intensifying efforts to control labor costs via wage growth compressions, better process efficiency and stronger labor productivity across all sectors. This aligns with Federal Reserve Chair Jerome Powell’s view that the labor market is not currently a source of inflationary pressures.
  
  
• We expect the Fed will adopt an extremely reactive approach amid elevated policy uncertainty, with policymakers heavily reliant on inflation and employment data to inform their decisions, potentially over-extrapolating short-term trends. In that regard, we wouldn’t be surprised to see policymakers adjust their inflation forecasts and favor a March rate cut given our expectation for softer inflation prints into the spring.