• The employment cost index (ECI) rose 1.2% in the first quarter, with wages and salaries up 1.2%.
• The ECI rose 4.9% in the prior quarter from a year ago, down from 5.1% in the fourth quarter of 2022.
• Strong underlying domestic demand coupled with sticky inflation support the case for the Fed to continue its hiking cycle next week.

Total compensation costs for civilian workers rose 1.2%, seasonally adjusted, for the three-month period ending in March 2023, according to the Bureau of Labor Statistics. This was slightly stronger than consensus expectations for a 1.1% increase and following a 1.1% (revised from 1.0%) increase for the three-month period ending in December. Wages and salaries increased 1.2% (versus 1.2% prior), and benefit costs increased 1.2% (versus 1.0% prior). On a year-over-year basis, the ECI rose 4.9% in the prior quarter, down from 5.1% in the fourth quarter of 2022.

The ECI tracks pay for individual workers over time and takes into account both pay and benefits. The ECI controls for industry and occupation, so it is a better measure of wage and compensation growth for an individual worker than the average hourly earnings measure from the monthly jobs report.

Employment costs picked up in the prior quarter after several states increased minimum wages and as wages continue to get bid up in the very tight labor market. Today’s ECI release in addition to yesterday’s hot GDP report (final sales to private domestic purchasers grew at an annualized rate of 2.9% and core PCE inflation accelerated in the first quarter to 4.9%) support the case for the Fed to continue its hiking cycle next week.

With a very tight labor market and increasing price pressures in the services sector, PNC forecasts the FOMC to raise the short-term fed funds rate by 25 basis points at its scheduled two-day meeting on May 2-3. Interest rate markets are now pricing in an 87% chance that the Fed will raise the fed funds rate by 25 basis points next week, compared to 47% a month ago.

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