Employment Cost Index Q2 2025

Non-inflationary labor market 

• Increased labor market softness along with wage growth compression efforts led to a moderate 0.9% quarterly increase in the Employment Cost Index (ECI) in Q2 2025, which is in line with the average gain over the prior four quarters, but slightly above expectations for a 0.8% gain. Wages and salaries increased 1.0%, which is above the trailing four-quarter average of 0.9%, while benefits only increased 0.7%.
   
• The private-sector wages and salaries component, which is closely watched by policymakers, grew 1.0%, following an 0.8% increase in Q1 2025. This was again above expectations, but monthly data indicates mid-year wage growth momentum has slowed considerably.
   
• Encouragingly, total compensation growth held steady year-over-year (y/y) at 3.6%, while private sector wage growth increased 0.1 percentage point (ppt) to 3.5% y/y. As a reminder, a reading around 4% is generally consistent with 2% inflation and 2% productivity growth, meaning there are no inflationary pressures filtering through from the labor market.
    
• Firms facing renewed cost volatility from escalating trade tensions remain focused on managing labor costs, increasingly through restrained wage growth, lower entry-level wages, reduced hiring, performance-based layoffs and non-replacements of retirees. This aligns with Fed Chair Jerome Powell’s view that the labor market is no longer exerting upward pressure on inflation. While these adjustments aim to protect margins, they are contributing to softer household income growth as elevated prices weigh on consumer spending.

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