US labour costs climb as inflationary pressures persist

US labour costs rose sharply as the pace of inflation quickened, providing additional cover for the Federal Reserve to act forcefully to temper demand in the world’s largest economy.

The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, climbed sharply in the fourth quarter. Total pay for civilian workers during that period increased 1 per cent, just shy of the record-setting 1.3 per cent jump seen between July and the end of September, and slightly below economists’ expectations.

That translated to a 4 per cent jump for the 12-month period ending last month.

Jay Powell, the Fed chair, cited the previous ECI release, which showed a 3.7 per cent increase in total pay for the 12-month period ending September, as a primary reason why the central bank decided in December to speed up the scaling-back of its stimulus programme.

Rather than continuing to buy government bonds to the end of June, the Fed is now planning to cease purchases of Treasuries and agency mortgage-backed securities in early March, right around the time it is expected to begin raising interest rates for the first time since 2018.

The most recent data on labour costs were released Friday alongside the US central bank’s preferred inflation gauge. The core personal consumption expenditures (PCE) price index increased 4.9 per cent in December from the year before and another 0.5 per cent from the previous month.

That was a modest acceleration from the 4.7 per cent annual pace reported in November and the fastest rise since September 1983. Once volatile items such as food and energy are factored in, the PCE index jumped 5.8 per cent.

The data reinforced the central bank’s decision to keep its options open for its monetary policy path forward.

Powell refused on Wednesday following the first two-day gathering of the Federal Open Market Committee to even rule out either raising interest rates at each of the seven remaining policy meetings this year, or considering supersized adjustments that bump up the federal funds rate by half a percentage point, as opposed to the typical quarter-point increase.

Market expectations for the policy path forward have since shifted, with traders now pricing in roughly four more interest rate increases in 2022 after “lift-off” from the current near-zero levels in March.

Soaring inflation and strong economic growth have forced the Fed to assume a much more hawkish stance than initially expected just a couple of months ago. The labour market has also made significant strides and now appears historically tight owing to an acute worker shortage.

The Fed chair on Wednesday reiterated that the central bank is “attentive” to the risks caused by “persistent” wage growth, which he warned could lead to even higher inflation.

“We have an expectation about the way the economy is going to be evolved, but we’ve got to be in a position to address different outcomes, including the one where inflation remains higher,” he later said.