US employment costs slow by more than expected at the end of 2023

According to the Department of Labor, in seasonally adjusted terms, the Employment Cost Index increased at a quarter-on-quarter pace of 0.9% (consensus: 1.0%) over the three months ending in December.

Covid distortions aside, that was the smallest increase since December 2019, Ian Shepherdson at Pantheon Macroeconomics noted.

It was also down from the 1.1% rise seen during the prior quarter.

Wage and salary growth experienced the largest slowdown within the ECI, from 1.2% in the third quarter to 0.9% in the fourth.

The quarterly rate of increase in benefits meanwhile slipped by two tenths of a percentage point to 0.7%.

In the private sector, wage and salary growth slipped from 1.2% to 0.9%, the least in two and a half years.

"With the annualised growth rate of wages already running at 3.7% in the fourth quarter, it is only a matter of time before annual wage growth follows that rate lower," said Andrew Hunter, deputy chief US economist at Capital Economics.

"Moreover, in an environment where productivity growth has accelerated to above 2% y/y (Q4 data are due on Thursday), wage growth at that pace would be consistent with unit labour cost growth remaining well below 2% y/y. The latter is not only consistent with price inflation being sustained at 2%, but raises the risk of it undershooting the target."

For his part, Shepherdson added: "The Fed does not need to keep fighting yesterday’s battles.

"Whether they cut in March is contingent on the upcoming inflation numbers, but a big ECI print would have made it much harder for them to justify easing, so this report effectively removes a potential barrier to early action."