Slower wage growth curbs US labor costs in third quarter

WASHINGTON, Oct 30 (Reuters) - US labor costs increased moderately in the third quarter amid a slowdown in wage growth, suggesting that the labor market was unlikely to be an inflation risk.

The economy is struggling with rising price pressures, mostly stemming from the ‌ongoing US-Israeli war with Iran, which has raised the cost of energy goods and fertilizers, as well as an AI investment boom. ‌The Federal Reserve on Wednesday left its benchmark overnight interest rate in the 3.75%-4.00% range while acknowledging that inflation "remains elevated." Economists expect the US central bank to raise borrowing costs in December.

"Labor-cost ​inflation continues to move in the right direction," said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets. "While consumer inflation remains elevated, the Fed will take some comfort from the fact that the labor market is no longer a significant source of price pressures."

The Employment Cost Index (ECI), the broadest measure of labor costs, rose 0.8% last quarter after increasing 0.9% in the April-June period, the Labor Department's Bureau of Labor Statistics said on Friday. The increase in the ECI was in line ‌with economists' expectations.

Labor costs advanced 3.4% in the 12 ⁠months through September after rising by the same margin in the year through June. 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 changes in job quality.

Wages and salaries, which account for the bulk of labor costs, climbed 0.7% last quarter after rising 0.9% in the second quarter. In the 12 months through September, wages increased 3.1%, mostly lagging inflation. They had advanced 3.2% in the year through June.

The government reported on Thursday that the Personal Consumption ​Expenditures ​price index shot up 3.6% year-on-year in September. Core PCE inflation, which excludes the volatile ​food and energy components, increased 3.1% on a year-on-year basis ‌in September. These two measures are tracked by the Fed for its 2% inflation target.

The BLS report showed wages adjusted for inflation dropped 0.6% in the 12 months through September after declining 0.3% in the year through June. Economists said this underscored what they called a cost of living crisis that was depressing consumer sentiment and tanking President Donald Trump's approval rating.

"Paychecks are barely able to keep workers' heads above water, trying to scratch out a living," said Christopher Rupkey, chief economist at FWDBONDS. "Bringing home a real paycheck that matches inflation is next to impossible for most Americans. No wonder consumer ‌confidence remains on the low side of life."