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The Federal Reserve, the agency with the U.S. government’s main inflation-fighting responsibilities, has made clear that it’s paying special attention to worker pay to figure out whether it’s getting living costs under control or not, and that its favored measure of pay is the Labor Department’s Employment Cost Index (ECI).

Therefore, it’s genuinely important that the new ECI (for the fourth quarter of last year) came out this morning. Even more important, the results undercut the widespread beliefs (especially by Fed leaders) both that worker compensation has been a driving force behind the inflation America has experienced so far, and/or has great potential to keep it raging.

Consequently, the new numbers seem likely to influence greatly the big choice before the Fed. Will it keep trying to raise the cost of borrowing for consumers and businesses alike in the hope of slowing spending enough to cool inflation even at the risk of producing a recession? Or will it decide that it’s made enough inflation progress already, and can tolerate current levels of economic growth – which the latest data tell us are pretty good) rather than stepping on the brakes harder.

The central bank likes the ECI better than the hourly and weekly also put out by Labor for two main reasons. First, it measures salaries and non-cash benefits, too. And second, it takes into account what economists call compositional effects.

That is, the standard wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by stripping out the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

According to the new ECI report, when you adjust for the cost of living, “private wages and salaries declined 1.2 percent for the 12 months ending December 2022” and “ Inflation-adjusted benefit costs in the private sector declined 1.5 percent over that same period.”

So for the last year, total compensation has risen more slowly, rather than faster, than inflation, That’s not the kind of fuel I’d want in my vehicle or home. (As known by RealityChek regulars, private sector trends are the ones that count because compensation levels there are set largely by market forces, rather than mainly by politicians’ decisions, as is the case for public sector workers.)

Blame-the-workers (or their bosses) types can argue that since late 2021, compensation has caught up some with inflation rates. Specifically, from December, 2020 through December, 2021, it had fallen in after-inflation terms by 2.5 percent. Between the next two Decembers, it had dropped by less than half that rate – 1.2 percent.

But it was still down – and this during a period when private business claimed it was frantic trying to fill unprecedented numbers of job openings in absolute terms.

Moreover, the new ECI release contained signs that even this modest compensation catch up could soon reverse itself. Between the first quarter of last year and the fourth, in pre-inflation terms, the total compensation increase weakened from 1.4 percent to one percent even. And for what it’s worth, both economists and CEOs still judge that the odds of a recession this year are well over 50 percent.

Fed Chair Jerome Powell has also expressed concerns about wage trends in what he calls the core service sector, because, as he put it at the end of last November:

This is the largest of our three categories, constituting more than half of the core PCE index.[the Fed’s preferred gauge of prices]. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”

The ECI releases don’t contain figures for this group, but if you look at total compensation for private service sector workers, it’s tough to see how they’ve been en fuego lately, either. Between the first and fourth quarter of last year, their rate of increase dropped by the exact same rate as that for the private sector overall. And although most economic growth forecasts lately have been far too pessimistic, almost no one seems to expect the current expansion to strengthen.

And if workers haven’t been able to reap a major inflation-adjusted compensation bonanza in the conditions that have prevailed for the last few months, or during earlier strong growth bursts since the CCP Virus struck the United States in force, when will they?

I remain concerned that living costs could remain worrisomely high – though not that they’ll rocket up again – because consumers still have lots of spending power, which will keep giving businesses lots of pricing power. But that’s not because Americans’ pay has exploded. It’s because government stimulus has been so mammoth in recent years, and could well stay unnaturally high.

Further, since such government spending is politically popular – and will remain more tempting for politicians to approve as the next election cycle approaches – my foreseeable-future forecast for the U.S. economy remains stagflation.  In other words, growth will be rather stagnant, and inflation will stay way too high.  And as the new ECI release suggests, workers could be left further behind the living cost eight ball than ever.