U.S. labor cost growth cooled in the fourth quarter from a year earlier, reassuring Federal Reserve policymakers wage pressures are gradually diminishing and no longer a key driver of inflation.

The employment cost index, which tracks changes in wages and benefits, increased 3.8% from the same period in 2023, the slowest pace in more than three years, according to Bureau of Labor Statistics figures out Friday.

On a quarterly basis, the gauge rose 0.9% after a 0.8% advance in the third quarter. That matched the median projection in a Bloomberg survey of economists.

The report supports the view that wage growth will continue to creep lower as labor demand cools. Smaller wage gains will help to limit growth in business costs, consolation for Fed policymakers looking for more sustained evidence of subsiding inflation before lowering interest rates further.

Though there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists and Fed policymakers tend to favor the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries.

The fourth-quarter increase in employment costs reflected a slight pickup for service providers, including governments. Labor cost growth at goods producers stepped down.

Wages and salaries for civilian workers increased 0.9% from the third quarter and 3.8% from a year earlier.

Adjusted for inflation, private-industry compensation grew 0.7% from a year earlier, while wages increased 0.8%.

A slew of government data due next week will offer further insights into the direction the labor market. The monthly jobs report, scheduled for Friday, is currently projected to show a still-healthy pace of hiring in January.

Government workers saw wages advanced 1.7% from the fourth quarter of 2023. While that sector has been a main reason behind labor market strength in recent years, many workers are apprehensive about what’s in store for them under the Trump administration.

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