US employment costs rose at a slower-than-expected pace in the closing months of 2022, but probably not enough to derail the Federal Reserve (Fed) from raising interest rates further and keeping them higher for longer to reduce inflation.

The employment cost index, a broad gauge of wages and benefits, increased 1 per cent in the fourth quarter, according to Labour Department figures released on Tuesday (Jan 31). Labour costs have risen at least 1 per cent for six straight quarters, extending what was already a record streak in data back to 1996.

The median estimate in a Bloomberg survey of economists called for a 1.1 per cent advance. US stock-index futures pared losses and Treasury yields declined after the report.

The data are consistent with other measures that show wage growth is slowing, though still not enough for the Fed to feel confident that such inflationary pressures have been quelled for good. Policymakers have been adamant that their work is far from over, which could lead them to keep interest rates high for an extended period of time.

The release comes at the start of the Fed’s two-day policy meeting, at which officials are expected to slow the pace of rate hikes to a quarter point. However, chair Jerome Powell will likely balance that with a still-hawkish tone and push back on bets that the central bank will lower borrowing costs this year.

Powell has been particularly concerned with inflation in services outside of energy and housing, which points to signs of more durable price pressures and largely reflects wages. Inflation in that category ticked up last month, though broader measures, which the Fed bases its inflation targeting, continued to cool, Commerce Department data released last week showed.

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The moderation in compensation gains last quarter was mainly due to a stepdown in employment costs at service providers.

Unlike the earnings measures in the monthly jobs report – which is forecast to show this week that average hourly earnings moderated in January – the ECI is not distorted by employment shifts among occupations or industries.

Compared with a year earlier, the labour costs measure rose 5.1 per cent, a slight pickup from the prior period. However, excluding incentive-paid occupations – a measure the Fed tracks closely – employment costs decelerated.

Labour costs have mostly been receding from record highs as turnover eases and several employers slow hiring or dismiss staff. The Atlanta Fed’s wage growth tracker decelerated to 6.1 per cent in December, the lowest in seven months.

However, many companies are still struggling to attract and retain workers. Walmart the largest private-sector employer in the US, is raising its starting wage 17 per cent amid inflation and heightened competition for workers, and Citigroup is bumping pay for junior bankers by as much as 15 per cent.

Wages and salaries for civilian workers rose 1 per cent in the final three months of 2022, while benefits climbed 0.8 per cent, the ECI report showed. Pay at state and local governments increased at less than half the rate as the prior quarter. BLOOMBERG