U.S. Employment Costs Picked Up in Third Quarter -- Update

The wages of American workers grew more strongly in the third quarter, a sign low unemployment is stirring inflation pressures.

The employment-cost index, a measure of wages and benefits for civilian workers, rose a seasonally adjusted 0.7% in July through September, the Labor Department said Tuesday. That matched the gain expected by economists surveyed by The Wall Street Journal.

Wages and salaries, which reflect more than two-thirds of the index, rose 0.7%. Benefits increased 0.8%, despite a slowdown in the growth of health-care costs, which decelerated to 1.1%, from 2.7% a year earlier.

The rise in overall costs marked one of the best quarterly gains in recent years and suggests the tight labor market is exerting pressure on employers to raise salaries to recruit and retain workers. The development could reassure the Federal Reserve as it considers raising interest rates by year's end. The Fed has been looking for higher inflation pressures as a sign the economy is growing steadily and the country is at full employment.

"We're kind of locked and loaded for a rate hike," said Chris Rupkey, chief financial economist at MUFG. "If wages continue [increasing] at this rate, we expect to see that inflation. Greater wages always lead to greater inflation somewhere down the road....The economic models aren't broken. It's building gradually over time."

It is too early to tell whether the quarter's strong wage growth will be sustained. Employment costs grew 0.8% in the first quarter of this year only to retreat to 0.5% growth in the second quarter.

But since then, the employment rate has dropped to a historic low, falling to 4.2% in September, and other economic readings, including GDP, have been strong, some outperforming analyst expectations.

"This could be sustainable," said Roiana Reid, economist at Berenberg Capital Markets. "We're finally seeing solid, nominal GDP growth. This seems to be the start of probably a new trend."

Over a broader period, compensation costs continue to grow modestly. The employment-cost index increased 2.5% over the past year, as did the wage and salary component. Those increases are just a touch above the trend of recent years.

Write to Sharon Nunn at sharon.nunn@wsj.com

(END) Dow Jones Newswires

October 31, 2017 13:14 ET (17:14 GMT)