By Lucia Mutikani
WASHINGTON (Reuters) - U.S. labor costs increased more than expected in the first quarter amid a rise in wages and benefits, confirming the surge in inflation early in the year that will likely delay a much- anticipated interest rate cut later this year.
The pick-up in labor costs reported by the Labor Department on Tuesday was despite signs of some easing in labor market conditions as supply rises. Adding to the darkening inflation picture, house prices accelerated in February amid tight supply. Housing has been a key driver of inflation through higher rents.
Federal Reserve officials started a two-day policy meeting on Tuesday. The U.S. central bank is expected to leave its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July.
"On balance, today's (labor costs) reading is not the end of the world for the Fed, but it is yet another data point that suggests the inflation slowdown that began this time last year stalled out in the first quarter of 2024," said Michael Pugliese, senior economist at Wells Fargo.
The Employment Cost Index (ECI), the broadest measure of labor costs, increased 1.2% last quarter after rising by 0.9% in the fourth quarter, the Labor Department's Bureau of Labor Statistics said.
Economists polled by Reuters had forecast the ECI would advance 1.0%. Labor costs increased 4.2% on a year-on-year basis after rising by the same margin in the fourth quarter. They have declined from a peak of 5.1% at the end of 2022. Some economists blamed the quarterly rise in wages on challenges adjusting the data at the start of the year for seasonal fluctuations.
The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
The report followed data last week that showed price pressures heating up in the first quarter.
The Fed has raised the policy rate by 525 basis points since March 2022. Financial markets have pushed back expectations of a rate cut this year to September from June.
A handful of economists continue to expect that borrowing costs may be lowered in July in the belief that the labor market will slow noticeably in the coming months. Others believe the window for the Fed to start its easing cycle is closing.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
EYES ON PRODUCTIVITY DATA
Wages increased 1.1% in the January-March quarter after advancing by the same margin in the prior three months. They jumped 4.4% year-on-year after rising 4.3% in the fourth quarter. Private sector wages rose 1.1% after gaining 1.0% in the prior quarter. They gained 4.3% in the 12 months through March. Wage gains remain above their pre-pandemic levels.
There were big increases in wages in the transportation and warehousing industry, professional and business services, wholesale trade, educational services. Retail wages were unchanged as were those in the finance and insurance sector.
Annual compensation costs increased 5.3% for union workers and were up 3.9% for non-union workers. Wages and salaries for union workers shot up 6.3% compared to the 4.1% rise for non-union workers in the 12 months through March.
State and local government wages accelerated 1.4% after rising 1.1% in the prior quarter. They surged 5.0% year-on-year after gaining 4.7% in the fourth quarter.
With fewer workers quitting their jobs in search of greener pastures and increasing labor supply, driven by a rise in immigration over the past year, economists expect wages to gradually trend lower this year and bring inflation closer to the Fed's 2% target. Though job growth accelerated in the first quarter, surveys including from the NFIB and Institute for Supply Management suggest a moderation ahead.
The Conference Board's consumer confidence survey on Tuesday showed households soured a bit on the labor market in March.
The survey's labor market's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, narrowed to 25.3 in April from 29.5 in March.
Some economists also anticipated the so-called residual seasonality, which they say boosted labor costs last quarter to fade. Others argued that worker productivity, which has quickened since the second quarter of 2023, would be key.
Productivity, however, appears to have decelerated in the first quarter based on last week's gross domestic product report. First-quarter productivity data is due to be published on Thursday.
"The growth rate of productivity is important in assessing how fast employment costs can increase without putting upward pressure on inflation or downward pressure on profit margins," said Conrad DeQuadros, senior economic advisor at Brean Capital.
"But if GDP is depressed by residual seasonality in the first quarter, then productivity will likely be as well and thus the increase in unit labor costs will be overstated."
Inflation-adjusted wages for all workers increased 0.9% year-on-year after rising 1.0% in the fourth quarter, which could help to underpin consumer spending and the overall economy.
Benefits increased 1.1% after gaining 0.7% in the October-December quarter. They advanced 3.7% year-on-year.
Another report from the Federal Housing Finance Agency showed house prices rebounded 1.2% in February after dipping 0.1% in January. They vaulted 7.0% year-on-year, the most since November 2022, after advancing 6.5% in January.
A fourth report from the Census Bureau showed there were 728,000 houses for sale in the first quarter compared to 665,000 in the first three months of 2023.
"It is clearer than ever that there is a massive housing shortage in the country," said Christopher Rupkey, chief economist at FWDBONDS. "Home prices are going to keep inflation higher for longer."