Employment Cost Index Q1 2024

Hotter sequential momentum temporarily halts disinflation 

  • Despite ongoing labor market rebalancing along with wage growth compression efforts by employers, the Employment Cost Index (ECI) rose a stronger-than-expected 1.2% in Q1 2024 – the largest gain in a year and higher than the 1.0% average gain over the prior four quarters. Wages and salaries rose 1.1% – in line with the average gain over the prior four quarters – while benefits also increased 1.1%.
  • The all-important private-sector wages and salaries gauge also advanced a stronger-than-expected 1.1% quarter over quarter (q/q) – the largest gain in a year and in line with the average 1.1% over the prior four quarters.
  • Disappointingly, stronger-than-expected sequential momentum meant that headline ECI compensation remained unchanged at 4.2% year over year (y/y) while private-sector wage growth held at 4.3% y/y. 
  • Still, one element of reassuring news is that ECI compensation growth remains tied for the slowest pace since Q4 2021, while private-sector wage growth is tied the lowest since Q2 2021 and 1.4 percentage points (ppt) below its Q2 2022 peak of 5.7%. 
  • Looking ahead, as labor demand and supply continue to rebalance, we foresee ECI wage growth easing further and gradually converging toward 3.0%-3.5% – a pace roughly consistent with the Fed’s 2% inflation target.
  • In a world where talent is more valued, our client conversations with business executives indicate intensifying efforts to control labor costs via wage growth compressions, better process efficiency and stronger labor productivity. Monthly data does indeed point to gently cooling of sequential wage growth momentum as measured by hourly earnings.
  • The Federal Reserve will likely hold the federal funds rate unchanged at 5.25%-5.50% during this week’s the Federal Open Market Committee (FOMC) meeting, and the policy statement will change very little. The Fed may announce plans to start tapering its quantitative tightening (QT) program in June while providing guidance on the desired QT timeline. 
  • With Jerome Powell indicating the Fed should allow restrictive policy further time to work and a clear majority of policymakers favoring two or fewer rate cuts in 2024, this report will push Fed officials to further assert their hawkish stance. Markets are currently pricing one rate cut this year – and that cut is only fully priced in by December.  
  • Overall, we believe that while there will likely be a consumer price inflation plateau around 2.5% in the coming months, it is not so far above 2% that it would warrant excessively tight monetary policy. Disinflation is still in place based on first principles and a laser-focused battle to rapidly bring inflation to the 2% target could do more harm than good for the US economy.
  • We expect only two 25 basis points (bps) rate cuts in 2024 in July and November but note that this ECI report could favor a further onset of the Fed easing cycle.


The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.