A broad gauge of US labour cost growth closely watched by the Federal Reserve cooled in the second quarter (2Q) by more than forecast, supporting a trend of gradually easing inflationary pressures.

The employment cost index, which measures wages and benefits, increased 0.9% in the April-to-June period, after rising by the most in a year at the start of 2024, according to Bureau of Labor Statistics figures out on Wednesday. The median estimate in a Bloomberg survey of economists called for a 1% rise.

The figures corroborate recent data that show the labour market is moderating towards its pre-pandemic trend. Other measures also point to cooling wage growth, as well as a slower pace of hiring and rising unemployment.

Fed chair Jerome Powell testified to Congress earlier this month that the job market is no longer an inflationary force, and he’s likely to give a similar assessment when he speaks at the conclusion of the central bank’s meeting later on Wednesday. While policymakers are expected to hold interest rates steady, Powell may hint at a cut in September given the recent softness in the labour market and a broader easing in price pressures.

The trend is also expected to show up in Friday’s employment report, in which employers are forecast to have added the fewest number of jobs in three months and pay gains moderated in the year through July.

A separate report from the ADP Research Institute showed companies added the fewest number of jobs in July since the start of the year, and worker pay growth slowed. Economists will get another look at quarterly labour costs in a report on Thursday, which takes changes in productivity into account.

The 2Q slowdown in employment cost growth was broad across private industries and included declines in construction, wholesale trade and information, according to Wednesday’s report. Compared with a year earlier, the Employment Cost Index (ECI) climbed 4.1%, the smallest annual advance since 2021.

Though there are a number of other earnings metrics published more frequently - including average hourly earnings figures from the monthly jobs report - economists tend to favour the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries. It’s also the Fed’s preferred wage measure.

Wages and salaries for civilian workers increased 0.9%, the smallest advance in three years. They were up 4.2% from a year ago, also the least since 2021.

Adjusted for inflation, private-industry compensation grew 0.9%, while wages increased 1.1% - both accelerations from the start of the year. The strength of the jobs market, including positive real earnings growth, has been key to sustaining household demand. Data out last week showed consumer spending remained healthy in June, encouraging signs for officials looking to cool inflation without breaking the economy.

  - Bloomberg