Paychecks grew more slowly in second quarter, Labor Department says

Pay and benefits for America’s workers grew more slowly in the April-June quarter than in the first three months of the year, a trend that could keep price pressures in check and encourage the inflation-fighters at the Federal Reserve.

Compensation as measured by the government’s Employment Cost Index rose 0.9% in the second quarter, down from a 1.2% increase in the previous quarter, the Labor Department said Wednesday. The figure matches last year’s fourth-quarter reading as the slowest in about two and a half years. Compared with the same quarter a year earlier, compensation growth was 4.1%, a slight drop from 4.2% in the first quarter.

Higher wages and benefits are good for employees, but slower pay growth will likely reassure Fed officials that inflation is steadily falling back to their 2% target. Rapid wage growth can lead many businesses to raise their prices to offset the higher labor costs.

Yet inflation is also cooling, so wage and benefit growth, adjusted for price changes, actually accelerated. Inflation-adjusted compensation rose 1.1% compared with a year ago in the second quarter, up from 0.8% in the previous three months.

The Fed is expected to keep its key short-term rate unchanged after its latest policy meeting concludes later Wednesday. Yet Fed officials are also likely to signal that the first rate cut in four years is on the horizon, probably at its next meeting in September.

There were other signs that the job market is cooling Wednesday. Payroll processor ADP says its count of U.S. jobs, excluding government, rose 122,000 in July, down from a 155,000 increase in June. Its measure of wages increased from a year earlier by a solid 4.8%, but that was still the slowest in three years.

“With wage growth abating, the labor market is playing along with the Federal Reserve’s effort to slow inflation,” Nela Richardson, chief economist at ADP, said. “If inflation goes back up, it won’t be because of labor.”