US employment costs rose 0.8% in the third quarter, matching economists' forecasts and slowing from 0.9% in the second quarter, the Bureau of Labor Statistics said on Oct. 30.
Over the 12 months through September, total compensation climbed 3.4%, the same pace as the year through June.
The Employment Cost Index is the Fed's preferred wage gauge because it strips out shifts in the mix of jobs and industries. Policymakers treat it as a predictor of core inflation.
Wages and salaries rose 0.7% in the quarter after 0.9% in the prior one, and 3.1% over the year. That annual pace is the slowest since the first quarter of 2021.
Benefits are eating the raise
Benefit costs rose 3.9% over the year, the fastest in three years, outpacing wages for a fourth straight quarter.
Private industry health benefit costs jumped 6.4%, matching a 20-year high set in the fourth quarter of 2025.
Health Benefit Costs Are Rising Twice as Fast as Wages
12-month growth through Q3 2026, %
Bar chart. 12-month Change (%). Total compensation: 12-month Change (%) 3.40%. Wages and salaries: 12-month Change (%) 3.10%. Benefits: 12-month Change (%) 3.90%. Private industry health benefits: 12-month Change (%) 6.40%.
Source: BLS, Reuters, Haver Analytics
Employers are covering pricier insurance and trimming the part of pay workers can spend.
Adjusted for inflation, wages and salaries fell 0.6% over the year after a 0.3% drop through June. Civilian compensation in constant dollars fell 0.4%, the weakest since Q4 2022.
What it means for the Fed
The Fed held its benchmark rate in the 3.75% to 4.00% range on Wednesday while calling inflation elevated, and economists expect a December hike.
That pressure comes from prices, not paychecks. The Personal Consumption Expenditures price index rose 3.6% in September, with the core measure up 3.1%, both well above the 2% target.
Cooling labor costs give the Fed one less reason to worry that pay is feeding those price gains.
"Labor-cost inflation continues to move in the right direction," said BMO Capital Markets senior economist Priscilla Thiagamoorthy.
The read-through runs through the consumer. Falling inflation-adjusted pay caps how much households can spend, and labor cost pressures remain contained enough that the squeeze is landing on wallets more than on corporate margins.
Consumer-facing sectors feel that first. Private leisure and hospitality wages rose 2.2% over the year, the slowest since early 2016, a sign employers in those industries see little pressure to bid up pay.
Hiring has stayed lackluster even as layoffs sit near historic lows, which explains part of the slowdown in wage gains.
Elevated inflation remains the Fed's main concern, with wage growth no longer adding to it.
