U.S. Labor Costs and Inflation Trends

WASHINGTON (Reuters) – U.S. labor costs recorded their smallest increase in more than three years during the third quarter due to cooling wage growth, indicating a firm downward trend in inflation.

The employment cost index (ECI), a broad measure of labor costs, rose 0.8% last quarter, according to the Labor Department's Bureau of Labor Statistics. This is the smallest gain since the second quarter of 2021 and follows an unrevised 0.9% increase in the second quarter.

Economists polled by Reuters had predicted an increase of 0.9% in the ECI. Labor costs rose 3.9% over the 12 months through September, the smallest rise since the third quarter of 2021, following a 4.1% gain in the year ending in June. Annual labor cost growth decreased from 4.3% in September 2023.

The ECI is considered by policymakers as a reliable measure of labor market slack and a predictor of core inflation as it adjusts for changes in job composition and quality. The Federal Reserve's inflation target stands at 2%.

Data released on Wednesday showed core inflation increasing at its slowest pace in nearly a year during the third quarter. The Fed initiated its policy easing cycle last month with a significant half-percentage-point interest rate cut, marking the first reduction in borrowing costs since 2020.

Currently, the Fed's policy rate is in the 4.75%-5.00% range, having been raised by 525 basis points in 2022 and 2023. A further 25 basis points reduction is anticipated next Thursday.

Wages and salaries, which represent the bulk of labor costs, increased 0.8% last quarter after a 0.9% rise in the second quarter. They rose 3.9% on an annual basis, showing a slowdown from 4.2% growth in the April-June quarter.

When adjusted for inflation, overall wages gained 1.4% in the 12 months through September, up from 1.2% in the previous quarter. This increase helped boost consumer spending and support economic growth last quarter.

Private sector wages and salaries also rose 0.8%, advancing 3.8% over the same 12-month period, down from 4.1% in the second quarter. State and local government wages increased 1.0% last quarter, following a 1.1% rise in the April-June quarter, with a 4.6% increase over the 12 months through September.

Benefits for all workers increased 0.8%, a decrease from a 1.0% rise in the second quarter, and climbed 3.7% over the year, down from 3.8% in the April-June quarter.