Economic Report: Workers love big raises. The Fed, not so much. Why pay has a big role in inflation fight.

by | Jan 30, 2023 | Stock Market

The fate of the economy in 2023 — and whether the U.S. sinks into recession — could depend on an obscure report on worker pay that only comes out four times a year. It’s called the employment cost index, and the next one is due Tuesday, just a day before the Federal Reserve is widely expected to raise U.S. interest rates again. The central bank pays very close attention to the ECI.

By contrast, the ECI report until very recently got little attention from Wall Street
investors, not to mention the broader public. It’s no wonder. Employee wages and benefits rose very slowly, about 2% to 3% a year, in the decade before the pandemic. They had very little affect on low U.S. inflation. Now, it’s a very different story. Employee compensation surged after the pandemic due to a major shortage of labor that gave rank-and-file workers more leverage over bosses for the first time in decades. Tens of millions of people quit one job for another and ended up getting paid more. Rising inflation itself also gave workers strong incentive to ask for higher wages. After all, their pay increases were not keeping up with inflation. The results were no surprise. The increase in pay and benefits jumped to a 5.7% annual pace in mid-2022 to mark the fastest advance since 1984 — the last time the U.S. experienced a similar bout of high inflation.

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