The Employment Cost Index—the Federal Reserve’s closely watched metric on wage growth—increased by 1.0% in the second quarter, the slowest rate since June 2021, the Bureau of Labor Statistics reported on Friday.
That brought the 12-month increase of overall employment compensation down to 4.5% from 4.8% in the first quarter.
The continuing deceleration in wage growth should ease the Fed’s concern over any potential wage-price spiral, which has been a primary concern for the central bank in its effort to restore price stability.
We do not expect another interest rate increase in September as the Fed begins to pivot from focusing solely on its price stability mandate to beginning to balance that with its other mandate—full employment.
Still, wage growth remained elevated compared to the pre-pandemic average, which ranged between 2.5% to 3% on a year-ago basis, much closer to the Fed’s long-term inflation target of 2%.
Given the fact that the Employment Cost Index is adjusted for composition biases unlike other common wage metrics, it is often less volatile, meaning that we should expect the path downward to be a long one.
Wage growth measured by the Employment Cost Index also often exceeded core inflation by a half to a full percentage point in the years leading up to the pandemic. That should give more room for inflation to come down further.
Easing inflation data
In a separate report by the Bureau of Economic Analysis, the Fed’s key metric for inflation—the personal consumption expenditure price index—fell to 3.0% on a year-ago basis, the lowest level since early 2021.
While much of the deceleration could be seen earlier in Thursday’s gross domestic product report, the specific breakdown of the supercore component—services excluding food, energy and shelter—was the most important factor.
The supercore slowed further to 0.22% from 0.23% on a monthly basis, and to 4.13% from 4.48% on a year-ago basis.
Another key data point from Friday’s report was household savings. The savings rate fell again to 4.3% from 4.6% earlier, bringing total savings to $870 billion on average in the second quarter.
According to our estimate, excess savings should remain above $600 billion by the end of the second quarter, enough for consumers to maintain their spending for at least one more quarter.
The timing remains consistent with our forecast that growth and spending will stay solid in the third quarter before easing around the start of the fourth quarter.
The takeaway
Both overall inflation and core inflation have been running around 0.2% on a monthly average recently, equivalent to about 2.5% inflation on an annualized pace. Barring any shocks, it is about as good as the Fed can hope for.
We do not expect another interest rate increase in September as the Fed begins to pivot from focusing solely on its price stability mandate to beginning to balance that with its other mandate—full employment.
The job now, though, is only getting more difficult as the data can be seen as signaling either a soft landing or a recession. A data-dependent Fed has effectively steered the plane toward the tarmac, but the plane still has to land.
Read more insights on employment and the workforce at RSMUS.com.
