Wages continue to rise, but they still aren’t keeping pace with inflation

(CNN) — Employers continued to raise wages during the fourth quarter to attract workers and hold on to existing staff, though the pace of the increases slowed from the previous quarter.

While workers won’t be happy that the pay boosts still aren’t keeping up with inflation, the deceleration will likely please the Federal Reserve, which meets this week to determine how much more to hike interest rates.

Wages and salaries for civilian workers increased by 1% in the fourth quarter and by 5.1% for the year ending in December, according to the Bureau of Labor Statistics’ quarterly Employment Cost Index released Tuesday.

This reflected a slowdown from the third quarter, when wages and salaries increased 1.3% quarter over quarter. For the year ending in September, wages and salaries were up 5.1%.

Economists expected the index to increase by 1.1% in the fourth quarter, according to consensus estimates on Refinitiv.

“The debate about wage growth is over: It is coming down,” said Nick Bunker, head of economic research at Indeed Hiring Lab. “Wages and salaries are losing momentum as demand for workers cools. The question is now when and how this descent ends.”

However, after adjusting for rising prices, wages and salaries declined 1.2% over the year ending in December. Though still negative, this metric is improving as inflation ebbs — inflation-adjusted pay had fallen 3% for the year ending in September.

Impact on the Fed

The Fed keeps a close eye on the Employment Cost Index to monitor the extent to which skyrocketing inflation is boosting wages — a factor in its decision of how much and how fast to raise interest rates. The central bank is expected to announce its latest move on Wednesday, with many observers forecasting only a quarter-point bump, following a similar deceleration in December when it hiked rates by half a point instead of three-quarters.

The latest report is not likely to change the Fed’s mind about rate increases, economists said.

Though the index is moving in the right direction, the pay increases remain too strong, said Rubeela Farooqi, chief US economist at High Frequency Economics.

“These are going to be the types of numbers the Fed wants to see, but it’s really not enough,” she said. “They need to see some loosening of the labor market so those wage pressures subside.”

Labor costs are still growing at about a percentage point above what would be consistent with the Fed’s 2% inflation target, according to Wells Fargo.

The ECI tracks changes in employers’ labor costs for wages and salaries, along with health, retirement and other benefits. The index is not subject to the same distortions as other measures, such as average hourly earnings, because it keeps the composition of the workforce constant.

Here’s who is seeing wage increases

Wage growth in the leisure and hospitality sector cooled to 0.9% in the fourth quarter, down from 1.8% in the prior quarter, before being adjusted for inflation, according to Wells Fargo. But these workers are seeing the strongest year-over-year pay hike, at 6.4%.

Retail and health care workers’ wages jumped 5.6% and 5.5% respectively, before adjusting for inflation, for the year ending in December.

But transportation and warehousing employees received only a 3.3% pay bump, and utility sector workers a 3.6% increase, before adjusting for inflation.

The picture looks less rosy once inflation is taken into account.

Leisure and hospitality workers, as well as retail employees, are the only ones who’ve seen their pay growth beat the rise in prices since the Covid-19 pandemic began, according to an analysis of the quarterly data by Jason Furman, an economics professor at Harvard University.

Their wages and salaries inched up 1.4% and 0.5%, respectively, since December 2019, the last quarter before the pandemic started.

Workers in the utility, construction and financial activities sectors, on the other hand, fared the worst. The pay declined 1.9%, 1.1% and 1.1%, respectively.