Scorching Wages Hide Record Drop In Inflation-Adjusted Pay

Headed into the weekend, top-tier US data provided some incremental evidence to support the contention that Q1 marked the peak in core inflation.

However, a scorching-hot read on a key indicator of compensation had the potential to stoke fears of a wage-price spiral, even as a cursory look under the hood revealed the tragic plight of the American worker in 2022.

The employment cost index surged 1.4% in the first quarter, the BLS said Friday. It was the hottest print in history (figure below), eclipsing the “old” record set just two quarters previous.

ECI carries weight at the Fed. Jerome Powell cited the series in December during a dramatized retelling of the moment he changed his mind about the proper course of policy in the face of acute price pressures.

Q4’s sequential print, you may recall, was actually cooler than expected, but compensation costs rose 4% on a YoY basis, while wages and salaries jumped 4.5% for the 12 months ended December. Those 12-month figures for the quarter ended March were 4.5% and 4.7%, respectively.

For private industry workers, wages and salaries rose 5% YoY during the period (figure below).

Total compensation rose 4.8% for private sector employees, also the most ever.

Benefit costs for private industry jumped the most on a 12-month, unadjusted basis since Q3 2005. For all civilian employees, benefit costs increased the most since Q4 of the same year.

Unfortunately, the inflation-adjusted figures were… well, unfortunate. And that’s what really matters, with an emphasis on “real.”

In 12-month, constant-dollar terms, wages and salaries for all civilian workers and private industry employees fell 3.6% and 3.3%, respectively. The matching figures for benefits were -4.2% and -4%.

As the figure (above) shows, private industry workers haven’t witnessed a more rapid deterioration in their inflation-adjusted wages in at least two decades.

The read-through is as simple as it is unnerving. The Fed will likely interpret the record-high headline ECI and benefit prints as evidence to support various wage-price spiral narratives and therefore as a green light to hike rates and tighten policy aggressively.

And yet, despite rapidly increasing compensation, real pay is falling at a record pace, which suggests demand will likely falter sooner or later.

Fed tightening could exacerbate the situation, a tragically ironic outcome considering the whole point of tighter policy is to bring down inflation and, as a consequence, drag real wage growth back into positive territory.