(Bloomberg) -- A broad gauge of US labor costs cooled by more than forecast in a fresh sign of easing inflation pressures that give Federal Reserve officials room to cut interest rates this year.

The employment cost index, which measures wages and benefits, increased 0.9% in the fourth quarter, the smallest advance since 2021, after rising 1.1% in the prior three-month period, according to Bureau of Labor Statistics figures released Wednesday.

A separate report from the ADP Research Institute showed companies added a smaller-than-expected 107,000 jobs in January, and worker pay growth slowed.

The easing in wage pressures is consistent with inflation that’s largely been receding faster than anticipated, while the slowdown in hiring raises downside risks for the labor market in coming months.

Fed officials are widely expected to leave the benchmark interest rate unchanged at the conclusion of their two-day meeting later on Wednesday. Investors marked up odds for a rate cut in March after the figures.

“With labor productivity climbing 1.5% to 2.0% in recent quarters, this pace of compensation growth is consistent with the Fed’s inflation objectives,” Neil Dutta, head of economics at Renaissance Macro Research, said in a note. “At this point, the longer the Fed waits, the more they become a source of downside risk to the economic outlook.”

Compared with a year earlier, the ECI was up 4.2%, the smallest annual advance since the end of 2021. Still, that’s well above the typical pace seen in the years before the pandemic.

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While there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists tend to favor 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 also rose 0.9% in the fourth quarter and were up 4.3% from a year earlier for the smallest annual increase since 2021.

Adjusted for inflation, private-industry compensation grew 0.7%, while wages increased 0.9% in the fourth quarter. The strength of the jobs market, including positive real earnings growth, has been key to sustaining consumer demand. Data out last week showed resilient household spending helped cap a year of surprisingly strong economic growth that defied recession calls.

What Bloomberg Economics Says...

“The slower pace of growth in the Employment Cost Index — the Fed’s preferred measure of wage gains — is great news for policymakers, suggesting wage pressure in the economy is slowing along with goods and services inflation. As wage pressures cool, the Fed can feel more comfortable considering rate cuts.”

— Estelle Ou, economist

For the full note, click here

Wages for service workers in the private sector increased at a slower pace in the fourth quarter from the prior three-month period. Since compensation is a major cost for employers in this sector, Fed officials monitor it closely through a subset of inflation known as core services excluding housing. Worker pay in goods-producing industries accelerated.

Other metrics point to slowing wage growth. The Atlanta Fed’s wage growth tracker, which is a three-month moving average of median pay, has stabilized at the slowest pace in two years. And the January jobs report, out Friday, is forecast to show average hourly earnings decelerated in the month.

--With assistance from Kristy Scheuble and Matthew Boesler.

(Adds economists’ comments)

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