Employment Cost Index Q1 2025

Easing wage cost pressures 

• A balanced labor market and employers’ deliberate efforts to contain compensation costs led to a moderate 0.9% quarterly increase in the Employment Cost Index (ECI) in Q1 2025 — matching the average gain over the prior four quarters. Encouragingly, wages and salaries increased 0.8% — the slowest pace since 2020 and slightly below the trailing four-quarter average of 0.9% — while benefits increased 1.2%.
   
• The private-sector wages and salaries component — closely watched by policymakers — posted its smallest gain since 2020, advancing 0.8%, below the 0.9% increase in Q4 2024.
   
• Encouragingly, the year-over-year (y/y) rate of total compensation growth eased 0.2 percentage points (ppt) to 3.6% — the slowest since Q2 2021 — while private-sector wage growth slipped 0.3ppt to 3.4% y/y, its lowest since Q1 2021.
   
• As we had been anticipating, with labor markets rebalancing, ECI compensation and private-sector wage growth has converged toward 3.5% — below the ~4% pace historically associated with 2% inflation and 2% productivity growth.
   
• Discussions with executives point to a sustained focus on controlling labor costs through wage restraint, operational efficiency and productivity gains. This supports Fed Chair Jerome Powell’s view that labor markets are no longer a source of inflationary pressure.
   
• However, trade policy uncertainty and rising tariff barriers are complicating the outlook. While labor cost pressures are easing, businesses now face growing input cost volatility and potential supply chain disruptions. As firms reassess production and sourcing strategies, the risk is that renewed price pressures could emerge — not from wages, but from policy-induced frictions.
   
• For the Fed, this likely means that businesses will be looking to pass on higher input costs to consumers — an inflationary impulse — while also looking to cut labor costs via wage compression efforts and pro-active labor force management — a disinflationary impulse.