Employee pay rose more than expected in sign of lasting inflation

US employee pay jumped more than expected in the first three months of this year — yet another sign that inflation could stay higher for longer.

The employment cost index (ECI), which measures worker compensation and benefits, gained 1.2% in the first quarter — surpassing the Dow Jones consensus estimate for a 1% advance, CNBC earlier reported.

Tuesday’s reading from the Labor Department — which traditionally signals underlying inflation pressures — was also above the 0.9% rise experienced in the fourth quarter of 2023.

March’s surprisingly resilient jobs report — which blew past economist expectations and said employers increased their payrolls by a staggering 303,000 last month — also doesn’t serve well for inflation’s slowdown.

Historically, a strong job market keeps wages and consumer spending levels elevated, thus fanning inflation and interest rates.

The latest economic data muddies the path forward for Federal Reserve Chair Jerome Powell, who said on April 16 that “given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”

The rate-setting Federal Open Market Committee begins its two-day meeting Tuesday.

When it concludes on Wednesday, Powell is expected to keep the federal-funds rate steady at its highest level in more than two decades.

News of the stiff advance across worker pay comes just days after the World Bank warned that the days of energy and other commodities serving as a deflationary force could be nearing an end, citing geopolitical tensions that have put pressure on demands for oil, industrial metals and other supplies.

The latest warning signs throw further doubt on the Fed’s ability to tamp inflation down to its 2% goal by the end of the year.

To bring inflation down from its 9.1% peak in the summer of 2022, central bankers issued a string of 11 rate hikes in an effort to cool down the economy, lifting borrowing rates to their current 23-year high, between 5.25% and 5.5%.

However, inflation has yet to come in below 3%. According to the latest Consumer Price Index, prices rose 3.5% in March — the highest year-over-year increase since December, when the inflation reading came in at 3.4%.

When inflation persists as it has, the Fed has historially hiked interest rates even further.

Fed officials have already signaled that a rate cut may no longer be in the cards for 2024.

“If we continue to see inflation moving sideways, it would make me question whether we needed to do those rate cuts at all,” Federal Reserve Bank of Minneapolis President Neel Kashkari said in an interview earlier this month.

A day later, Fed Governor Michelle Bowman said on Friday that interest rates may even move higher.

“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” Bowman said.

“Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2% over the longer run,” she added in prepared remarks to a group of Fed watchers in New York in early April.

Wall Street, however, is still holding out for two rate cuts — the first of which is now widely anticipated to take place in September.

Traders are also predicting there will be two cuts of 25 basis points instead of the three that had been projected this year, totaling 75 basis points.

The stubborn inflation complicates President Joe Biden’s claims to be making steady progress against higher prices.

Biden had previously suggested that lower inflation would lead the Fed to cut rates, but he hedged that prediction earlier this month shortly before data released by the Commerce Department showed that gross domestic product (GDP) grew at an annualized pace of 1.6% during the three-month period ended in March — below the 2.4% projected by economists.

The growth rate was the lowest since 2022 and came in much lower than fourth-quarter GDP, which was revised up to 3.4%, and marked a cooldown from the quarter prior, when it was 4.9%.

More troubling — though perhaps unsurprising — was that prices have remained sticky.

The day after the disappointing GDP data was released, the personal consumption expenditures (PCE) price index excluding food and energy — the Fed’s preferred inflation gauge — surged at a 2.8% rate in the first quarter, versus the central bank’s 2% target.