Labor Costs Jump by Most in 2 Decades, Adding to Inflationary Surge

U.S. employment costs jumped by the most in two decades, adding pressure on the Federal Reserve to keep inflation in check and possibly opening a new chapter in the bitcoin (BTC) market narrative.

The employment cost index (ECI), a lesser-known economic indicator that tracks wages and benefits, rose by 1.4% in this year's first quarter, according to a report published by the Labor Department Friday.

Labor costs increased 4.5% compared to a year ago. Analysts had expected a 4.3% jump.

This means that employers are paying workers 1.4% more on average than three months ago, signaling a tight labor market. Higher wage costs might add further pressure on inflation, already at at four-decade high of 8.5% – that has so far largely been blamed on supply-chain disruptions and commodity-price increases due to COVID-19 restrictions and, more recently, the Ukraine-Russia war.

Bitcoin traders and analysts monitor inflation because the largest cryptocurrency by market value is considered by some investors to be a hedge against inflation, or as a risky asset whose price can rise or fall depending on Federal Reserve monetary policy and the U.S. dollar's strength in foreign-exchange markets.

The labor market is currently at or near full employment, meaning that nearly everyone who wants to work has a job. There were 11.3 million job openings in February but only 5.4 million people were looking for a job that month.

The ECI is widely watched as an indicator of the current labor market situation. In essence, it measures inflation in wages. Especially during the Alan Greenspan era of the Fed, the ECI was seen as the most reliable measure to track labor costs.

Another index published Friday by the Commerce Department was the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure to track inflation.

The PCE, which tracks inflation in a more comprehensive way than the widely followed consumer price index (CPI), climbed 6.6%, up from 6.4% in February, a fresh 40-year high.

The Fed is widely expected to raise the benchmark U.S. interest rates by 50 basis points (0.5 percentage point) at its May meeting next week. In a panel hosted by the International Monetary Fund (IMF) last week, Fed Chair Jerome Powell said that “it may be that the actual [inflation] peak was in March, but we don’t know that, so we’re not going to count on it.” He added that it might be appropriate to “move a little more quickly” in tightening monetary policy to keep inflationary pressures in check.

With the ECI growing at such a fast pace and PCE at a fresh high, analysts are increasingly expecting the Fed to raise its interest rate by 75 basis points in June, according to data from the CME Group's FedWatch tool. Market-implied odds of a 75 basis point increase in June are currently 99.1% versus 15.9% a month ago.