Some goods news for the inflation outlook: Q1 ECI

Summary

The first quarter's employment cost index reflected the ongoing softening in the labor market. Labor costs advanced 0.9% in Q1, bringing the year-over-rate down to nearly a four-year low of 3.6%. While concern about inflation has picked up amid dramatic changes to trade policy, inflationary pressures from the labor market continue to subside.

Not everything is inflationary

Labor compensation growth continues to moderate. The employment cost index (ECI), the Federal Reserve's preferred measure of employment costs, rose 0.9% in the first quarter, in-line with expectations. Although the quarterly run rate is still hotter than pre-pandemic norms, employment cost growth continues to trend lower. Over the past year, the ECI has risen 3.6%, the slowest pace since 2021 (chart). The gradual moderation is reflective of a cooled hiring environment that has eased the pressure on employers to raise compensation to attract and retain workers.

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