Federal Reserve Might Need a New Excuse to Stay Hawkish
The central bank has zeroed in on a ridiculously specific metric to justify its rate increases. Even that is showing signs of improvement.
Service-sector compensation has the Fed’s undivided attention.
Photographer: Michael Loccisano/Getty Images
The Federal Reserve is running out of good excuses to stay hawkish. Energy costs have retreated; prices of core goods have declined; and the housing market is cooling quickly. The last redoubt of high and volatile prices is the wage-sensitive category of consumer prices dubbed core-services ex-housing: expenditures including medical care, communication services and hair cuts. If you take the Fed’s word for it, the key to taming inflation in that category is to reduce wage pressure.
Yet data released Tuesday suggests that goal might not be as remote as previously thought. Total compensation costs for service-providing industries rose at a 1% pace in the last quarter of 2022, down from a peak of 1.4% earlier in the year. Annualized, that translates into a trend rate of service compensation inflation of around 4.2% — clearly above the 2017-2019 average of 2.8%1but moving in the right direction. A continuation of current trends could leave policymakers in a comfortable place relative to service wages in another quarter or two.