In the third quarter of 2021, a rise in US wages and benefits posed a significant challenge to the Federal Reserve’s efforts to combat inflation. According to data from the Labor Department, the Employment Cost Index (ECI), a crucial compensation indicator, saw an increase of 1.1%, marginally up from the second quarter’s rise of 1%. However, when adjusted for rapid inflation, total compensation growth dropped to 0.6% compared to the same period a year earlier, marking a significant decline from Q2’s 1.6% increase.
Economists have pointed out a cooling trend in average pay. Wages and salaries for private sector workers, excluding bonuses and incentive pay, recorded a mere 0.9% rise, down from the previous quarter’s 1.1%. The ECI is an essential metric for Federal Reserve officials as it reflects changes in pay across the same job roles over time.
During fall of last year, ECI-tracked pay and benefits growth reached a peak of 5.1%. However, swift inflation has eroded Americans’ purchasing power. The Fed’s objective is to slow down inflation to facilitate inflation-adjusted income gains even amidst smaller pay hikes. Fed Chair Jerome Powell has suggested that yearly wage increases of approximately 3.5% are consistent with the central bank’s 2% inflation target.
Fast-forwarding to October this year, Europe’s inflation rate decreased to 2.9%, influenced by dropping fuel prices, but growth has been stagnant. Surging interest rates and an uncertain economic outlook might lead to Federal Reserve’s inaction. Meanwhile, the US experienced robust wage growth this summer, further complicating the Fed’s fight against inflation.
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