The monetary policy gods meeting this week at the Eccles building in Washington aren’t likely to find very much at all to like about the first three months of 2024. Core inflation accelerated, energy prices bounced back and financial conditions eased on the back of a strong stock market — a combination that’s unlikely to add up to Federal Reserve rate cuts anytime soon. Adding insult to injury: The gold standard of compensation measures just revealed a sequential acceleration in the first quarter, providing more ammunition to those who would argue that wage and price inflation are getting stuck at a pace that’s inconsistent with the central bank’s target.

I still doubt it, but there’s no denying that these reports will have a real impact on the near-term path of interest rates.

The Bureau of Labor Statistics’ employment cost index showed Tuesday that compensation costs for civilian workers rose 1.2% in the first quarter from the previous three months, exceeding all economist projections in a Bloomberg survey and accelerating from the 0.9% increase at the end of 2023. The numbers were driven, in part, by a pickup in the pace of state and local government raises and, in private employment, by the professional and business services supersector, which includes such industry groups as legal services, accounting and engineering, among others.

While a jump in ECI helped push the Fed toward rate hikes in 2021, the macroeconomic backdrop was vastly different then and the risks are much more subdued today. Back then, policymakers had good reason to worry about a wage-price spiral, in which higher wages would spur companies to hike consumer prices to keep up with cost pressures, creating a never-ending doom loop like the 1970s. That never happened, of course, because the public’s inflation expectations proved very well-anchored. In the current context, the worst-case scenario is that wages may end up putting a floor on certain types of service costs and prevent inflation from converging on 2% in a timely fashion. That’s certainly a risk, but how concerning is it really?

Clearly, the government pay increases mostly just reflect catchup, and governments don’t produce consumer goods that would be sensitive to wage costs.

The developments in professional and business services bear watching, on the other hand, but could ultimately prove fleeting. Payrolls for that supersector actually contracted for several months in late 2023, and though hiring bounced back in the first quarter, it wasn’t exactly a frenzy. The flurry of activity and compensation growth may simply reflect surgical additions to staff as companies try to navigate this dizzying economy. The recent streak of raises may also be consistent with the excess seasonality concerns that have come up in the context of other first-quarter inflation data: it’s possible that companies have used the start of the new calendar year to push through one last round of price hikes in a way that wasn’t fully captured by the seasonal adjustment process. On a year-over-year basis, the employment cost index rose 4.2% in the three-month period, the same as the fourth quarter.

The upshot was that the yield on two-year Treasury notes climbed as high as 5.03%, the highest since Nov. 14 on an intraday basis. Fed funds futures traders, who earlier this year saw as many as six or seven rate cuts in 2024, now expect just one by December.

Readers of this column know that I’ve generally been sanguine about the unexpected pickup in first-quarter inflation data; it hasn’t dissuaded me from my longer-term optimism about consumer prices and policy rates. By and large, most gauges show that the disinflation story remains intact and that the labor market is still in the process of normalizing after the extreme pandemic disruptions. But I’ve underestimated the inherent lags in this process.

Still, it’s always strange to talk about wage increases as a bad thing — and they’re not, even if Tuesday’s modest stock and bond-market selloff suggests as much. First and foremost, they’re a clear positive for American workers trying to maintain their purchasing power. For inflation, they’re probably a neutral development in the medium term. But in a world in which Fed policymakers were already on edge about stalling disinflation, they’re clearly not great for the near-term interest rate outlook.

Jonathan Levin is a columnist focused on US markets and economics. Previously, he worked as a Bloomberg journalist in the US, Brazil and Mexico. He is a CFA charterholder.

This column was provided by Bloomberg News.