Rising U.S. labor costs are doing little to drive up inflation, researchers from the Federal Reserve Bank of San Francisco said on Tuesday, a finding that may undercut the argument that wage gains are key to elevated price pressures.
The analysis by Adam Shapiro in the latest edition of the FRBSF Economic Letter showed that labor costs as measured by the employment cost index contributes nothing to goods or housing services inflation, and accounts for only a very small portion of non-housing services inflation.
The Employment Cost Index (ECI), which rose sharply from 2021 to 2022 in tandem with inflation, is the broadest U.S. measure of labor costs and one followed closely by Fed policymakers. It peaked in mid-2022 at around 5.1%, and in the first quarter eased to a 4.8% annual pace.
Meanwhile, inflation by the Fed's preferred measure peaked at around 7% last year and in April was running at 4.4%, still more than twice the Fed's 2% target.
Shapiro's analysis showed that the recent surge in the ECI explains only a tenth of a percentage point of the three-percentage-point gain in underlying inflation over the same period.
Rather than driving inflation, wages may actually follow it, Shapiro wrote. "The results highlight that recent labor-cost growth is likely to be a poor gauge of risks to the inflation outlook," he concluded.