U.S. employment costs rose at a robust pace for a second straight quarter, ending the strongest year of labor inflation in two decades as businesses competed for a limited supply of workers.
The service cost index, a broad measure of wages and benefits, rose 1% in the fourth quarter, according to figures from the Department of Labor released Friday. This followed a 1.3% improvement seen in the third quarter, which was the strongest quarterly increase in comparable data back to 2001.
Compared to a year earlier, ECI has risen by 4%, the most in two decades.
Remuneration gains last quarter were broad-based across industries. Wages and salaries for civilian workers increased by 4.5% from a year earlier, the most in comparable data back to 2001.
The back-to-back quarterly advances highlight how a tight labor market has pushed businesses to raise wages to attract and retain employees. In some cases, this has led to lower profits, but many companies have passed on those costs to consumers through price increases.
The popular paint manufacturer Sherwin-Williams Co. increase prices next week by 12% to offset higher costs. This is partly because labor costs are accelerating faster than in previous years, with some workers seeing their wages rise by double digits, according to the company. Meanwhile, McDonald’s Corp. said higher labor and commodity costs “more than offset” sales growth for U.S.-owned stores in the U.S. last quarter.
Excluding the government, private wages rose by 1.2% over the previous quarter and a strong 5% over a year earlier. Although the quarterly profit was smaller than the previous period, it reflects a slowdown in incentive payments in the financial sector, according to Omair Sharif, founder of Inflation Insights LLC.
Changes in Private Industry Wages (QoQ)
- Retail sales increased by 3%
- Accommodation and food services rose by 1.8%
- Healthcare rose by 1.7%
- Property / Rental increased by 1.7%
- Construction progressed 1.3%
Unlike the earnings measures in the monthly job report, the ECI is not distorted by job shifts between occupations or industries. As a result, the boom in the third quarter caught the attention of many. Fed Chairman Jerome Powell cited the measure in December as a key reason for the central bank’s pivot after a more aggressive stance on inflation.
This is partly due to concerns about a wage price spiral, a term used to describe a self-feeding loop in which workers ask for higher wages to help offset inflation’s impact on their purchasing power. To help offset costs, businesses then raise prices further, fueling the cycle. But it takes time for such an inflationary spiral – last seen in the 1970s – to take hold. Rising productivity also helps absorb that inflationary pressure.
A separate report released on Friday showed that inflation-adjusted personal spending fell by 1% last month, the most since February, as a closely watched core price benchmark rose a larger-than-predicted 4.9%. This was the largest annual progress since 1983.
A host of factors, including transportation bottlenecks, capacity constraints and stimulus-driven demand for goods, have driven inflation to an almost 40-year high. But rapid wage increases – if sustained – run the risk of keeping inflation high for longer. Powell said Wednesday the central bank is ready to raise interest rates in March to combat the rapid price rises.
How companies see it
“Drivers’ wages have risen significantly in every department… Our cost per rent is higher. We have seen higher signs of bonuses and the market is very, very difficult with the drivers out there outside Covid. ” – Nick Hobbs, Chief Operating Officer of JB Hunt Transport Services Inc. on January 18
“In addition to the historically high level of commodity raw material prices, we are also experiencing rising costs in other areas such as labor and utilities. We expect to continue to proactively work with our customers to implement additional sales price increases in the first quarter. ” – Michael McGarry, CEO of PPG Industries Inc. on January 21
“We expect that all commodity categories will be significantly increased. We expect other costs, including wages and transportation, to rise in the mid-to-high single-digit range. We are currently implementing additional price increases in all businesses and will continue to do so as needed. ” – John Morikis, CEO of Sherwin-Williams Co. on January 27
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–With the help of Kristy Scheuble.