Employers spent 4% more on wages and benefits last year as workers received larger pay raises in a tight labor market, rebounding economy and period of accelerating inflation, marking an increase not seen since 2001.
The U.S. employment-cost index—a quarterly measure of wages and benefits paid by employers—showed that costs continued to rise at the highest rate in two decades. The fourth-quarter gain, compared with a year ago, was 4% on a non-seasonally adjusted basis, the Labor Department said Friday.
Still, the figures offered a sign that labor-cost increases could be easing, with the Labor Department reporting a seasonally adjusted 1% rise in compensation for the fourth quarter, down from with a 1.2% increase the previous three months.
Separate economic figures showed that the Federal Reserve’s preferred measure of inflation, the core personal-consumption expenditures price index, accelerated to 4.9% in December 2021 over the prior year. And household spending fell 0.6% last month, the Commerce Department said Friday, as consumers pulled back on shopping for goods during the last month of the holiday season.
Rising pay and benefits are putting more money in workers’ pockets—average hourly wages rose 4.7% in December from a year earlier—but not enough to keep pace with rising prices. Inflation recently hit its fastest pace in nearly four decades amid supply and demand imbalances for both goods and labor related to the Covid-19 pandemic.
Economists caution that there are numerous factors contributing to high inflation during the pandemic, especially an overwhelmed supply chain.
Pay Practices in the Pandemic
“Inflation has fundamentally picked up and I think it’s fair to say that price gains are feeding back into wage gains as well,” said
Ben Herzon,
executive director at IHS Markit. “There’s a lot of pressure on the supply side on both commodities and labor.”
Investors and Federal Reserve policy makers now consider the labor market to be at or near full employment, despite the fact that the economy has only recovered about 84% of the jobs it had before the pandemic. The labor force has shrunk, and with the unemployment rate now below 4%, the Fed is shifting gears from providing stimulus to the economy to fighting inflation while trying to maintain the labor-market recovery.
After signaling that the Fed would begin steadily raising interest rates in March, Chairman
Jerome Powell
said Wednesday that he believed that price increases have been primarily tied to the “dislocations caused by the pandemic.”…
Read More: U.S. Wages, Benefits Rose at Two-Decade High as Inflation Picked Up