US wages rose at a solid pace this summer, posing challenge for Fed's inflation fight

WASHINGTON (AP) — Wages and benefits grew at a slightly faster pace in the July-September quarter than the previous three months, a benefit for workers but a trend that also represents a risk to the Federal Reserve's fight against inflation.

Compensation as measured by the Employment Cost Index increased 1.1% in the third quarter, up from a 1% rise in the April-June quarter, the Labor Department said Tuesday. Compared with a year ago, compensation growth slowed to 4.3% from 4.5% in the second quarter.

Adjusted for inflation, total compensation rose 0.6% in the third quarter compared with a year earlier, much slower than the second-quarter increase of 1.6%.

By some measures, average pay cooled, economists pointed out. Wages and salaries for private sector workers, excluding those who receive bonuses and other incentive pay, rose 0.9% in the third quarter, down from 1.1% in the previous period.

Fed officials consider the ECI one of the most important measures of wages and benefits because it measures how pay changes for the same mix of jobs, rather than average hourly pay, which can be pushed higher by widespread layoffs among lower-income workers, for example.

Growth in pay and benefits, as measured by the ECI, peaked at 5.1% last fall. Yet at that time, inflation was rising much more quickly, reducing Americans' overall buying power. The Fed's goal is to slow inflation so that even smaller pay increases can result in inflation-adjusted income gains.

Fed Chair Jerome Powell has indicated that pay increases at a pace of about 3.5% annually are consistent with the central bank’s 2% inflation target.

While higher pay is good for workers, it can also fuel inflation if companies choose to pass on the higher labor costs in the form of higher prices. Companies can also accept lower profit margins or boost the efficiency of their workforce, which allows them to pay more without lifting prices.