The rate of compensation cost increases was slower than expected in Q2, a closely-watched update on one of the Fed’s favorite metrics showed.

The Employment Cost Index rose 0.9% last quarter, the BLS said Wednesday. Economists were looking for a 1% gain.

Recall that Q1’s ECI headline was the quickest since 2022. By contrast, Q2’s unrounded print was the slowest in three years.

This constitutes yet another piece of evidence to suggest the succession of a warm reads on inflation and pay growth metrics during Q1 were a bump in the proverbial road, not indicative of a structural re-acceleration in price and wage pressures.

As I never tire of reminding readers, it was a sharp pickup in the ECI headline which motivated Jerome Powell’s initial hawkish pivot in late 2021. Powell may very well point to Wednesday’s relatively cool print while regaling reporters at his post-FOMC press conference.

The release showed wages and salaries for private sector employees rose 4.1% YoY during Q2. As the figure below shows, that was the coolest pace since Q2 of 2021, which is to say the coolest since inflation accelerated in earnest in America.

Note that the private sector wages and salaries series tends to follow the quit rate (from the JOLTS report). Data out earlier this week showed the quit rate was 2.1% in June, the lowest in almost four years.

If the relationship illustrated above holds, private sector comp growth should slow to around 3.5% in the months and quarters ahead. That’d be generally consistent with price stability.

I doubt there’s much utility in parsing the ECI release any further. The bottom line is that virtually all of the incoming data points to additional moderation in wage growth or, at the very least, suggests the threat of a wage-driven re-acceleration in consumer prices (i.e., a wage-price spiral) has faded such that it needn’t be an impediment to rate cuts.