US labour costs increased in the first quarter by the most in a year as productivity gains slowed, potentially adding to risks inflation will remain elevated.

Unit labour costs, or what a business pays employees to produce one unit of output after taking into account changes in productivity, climbed at a 4.7 per cent annual rate. That marked a notable jump after muted gains in the second half of 2023.

Productivity, or nonfarm employee output per hour, rose at a 0.3 per cent annualised rate after an upwardly revised 3.5 per cent gain in the prior period, data from the Bureau of Labor Statistics showed on Thursday (May 2).

The median forecast in a Bloomberg survey of economists called for a 4 per cent increase in labour costs and a 0.5 per cent rise in productivity.

While quarterly productivity figures are quite volatile, a sustained slowdown represents another hurdle for the Federal Reserve’s inflation fight. With interest rates expected to stay at a two-decade high for awhile longer, business investment in equipment will likely continue to be a weak factor in overall economic growth.

The Thursday figures corroborate other data that showed gross domestic product cooled in the first quarter while employment costs rose by the most in a year. As a result, inflation is proving stubborn, supporting the Fed’s pivot to a more hawkish stance that will keep interest rates higher for longer than anticipated.

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Chair Jerome Powell, speaking after the central bank’s policy meeting on Wednesday, said it’s hard to judge whether the robust productivity gains seen in 2023 will endure. He’s previously said that an increase in immigration can support economic growth without adding to inflation, and the influx has also been shown to enhance productivity.

The report showed output rose at a 1.3 per cent pace in the first quarter from the prior three-month period – the smallest advance since a decline nearly two years ago – while hours worked increased 1 per cent. As a result, hourly compensation growth advanced 5 per cent from the previous quarter, the most in almost a year. BLOOMBERG