WASHINGTON — U.S. labor costs rose 0.8% in the third quarter as the Employment Cost Index, the Labor Department’s broadest gauge of wages and benefits, slowed to a 3.5% annual increase, the weakest pace in more than four years. The cooler Employment Cost Index reading points to easing wage and benefit pressures that could help the Federal Reserve contain inflation without triggering a deep downturn, Dec. 10, 2025.
Employment Cost Index signals gentler wage growth
The Employment Cost Index increased 0.8% between June and September, down from a 0.9% gain in the prior quarter and below economists’ expectations for another 0.9% rise, according to the Labor Department’s official Employment Cost Index release. Over the past year, total compensation rose 3.5%, edging down from 3.6% in June and marking the slowest annual gain since mid-2021, with wages, salaries, and benefits all advancing at roughly the same 3.5% pace.
A detailed Reuters analysis noted that the report was delayed by a 43-day federal government shutdown, which reduced survey response rates and could mean larger revisions later. Even so, the core message is clear: wage growth has cooled, especially in services industries, while inflation-adjusted pay is barely rising, with real wages up only about 0.6% over the past year.
For the Federal Reserve, the third-quarter numbers are another sign that labor costs are no longer the primary engine of price pressures. Wages and salaries rose 0.8% in the quarter after a 1.0% increase in the spring, and benefits also climbed 0.8%, up from 0.7%. Together with softer job openings and falling quit rates, the Employment Cost Index is reinforcing the view that the labor market is “gradually cooling” as the Fed cuts interest rates, including a 25-basis-point reduction announced Dec. 10.
For workers, the picture is more complicated. A recent MarketWatch breakdown found that compensation is still rising slightly faster than consumer prices, but the gap has narrowed as inflation hovers in the high-2% range while pay gains drift toward the mid-3s. That means households are seeing only modest real income growth, even as employers feel less pressure to offer aggressive raises or signing bonuses.
A cooler Employment Cost Index marks a sharp turn from 2022’s wage surge.
The latest reading also underscores how far the pay cycle has come since the post-pandemic boom. At the height of the wage surge in late 2022, the Employment Cost Index jumped 1.2% in the third quarter alone, with private-sector wages up 5.2% year-over-year, Reuters reported at the time. Back then, rapid pay gains were seen as a key driver of the inflation spike that pushed the Fed into its most aggressive tightening campaign in decades.
By late 2023, those pressures had begun to ease. Quarterly ECI gains slowed to about 0.9% and the annual rate fell toward 4.2%, according to a subsequent Reuters story that highlighted the smallest yearly increase in labor costs in roughly two years. From there, pay growth cooled further through 2024 and into 2025, with the index drifting steadily lower from its cycle high of just over 5% toward this year’s 3.5% pace.
What the trend means for inflation and policy
Policymakers closely track the Employment Cost Index because it controls for changes in the mix of jobs and separates wages from benefits, making it a cleaner signal of underlying labor costs than average hourly earnings. With the index now advancing at roughly a 3½% % yearly rate and trending down, many economists argue that pay growth is broadly consistent with the Fed’s 2% inflation goal, especially if productivity holds up.
Still, the latest report is not entirely clear. The Bureau of Labor Statistics has warned that the shutdown-related hit to response rates could increase the odds of revisions, and some analysts note that slower wage growth may also restrain consumer spending at a time when high borrowing costs already squeeze households. For now, though, a softer Employment Cost Index offers rare good news for inflation watchers — and a hint that the Fed may be able to continue edging rates lower without reigniting the price surge it has spent the last three years trying to tame.
