US first quarter unit labour costs have been revised to show a 6.6% increase, compared to the originally expected 5.7%. The preliminary figure was a 5.7% rise, significantly higher than the previous 2.0% increase.

Productivity saw a decline of 1.5%, revised from a preliminary decrease of 0.8%. Previously, productivity had increased by 1.7%. The current data indicates a rise in labour costs alongside a drop in productivity.

Labour Costs Versus Productivity

What we’re seeing here is a sharp revision upward in unit labour costs during the first three months of the year, now standing at 6.6% instead of the original 5.7%. This change not only confirms that labour is becoming more expensive for businesses but also adds further pressure on margin expectations, particularly in sectors where wage inflation is harder to pass along to end consumers.

At the same time, revised productivity figures show a drop of 1.5%, which follows what had previously looked like a softer decline. This is a meaningful shift, considering the earlier quarter had shown productivity growth of 1.7%. When firms are paying more for labour while getting less output per worker, there’s no other way to slice it—this creates an environment where inflationary pressures can build beneath the surface.

From our perspective, the mismatch between the cost of labour and its output implies a deterioration in production efficiency. This isn’t just a headline change; it cuts directly into assumptions about inflation persistence. If businesses continue to face rising employment costs without a corresponding increase in output, then price pressures won’t ease simply due to cooling demand alone.

This all feeds directly into forward expectations about policy rather than just short-term noise. Powell and his colleagues have built their messaging around a “wait and see” approach, particularly when it comes to measuring whether tight financial conditions are doing enough to contain inflation. The increase in labour cost and drop in productivity doesn’t help that cause—but rather supports the idea that inflation is less responsive to softer consumption data than previously thought.

Impact On Policy And Market Expectations

For those of us responding to these signals, pricing in volatility through the second quarter becomes less about reacting to rate decision dates and more about interrogating the stickiness in input costs. The firmness in wage pressure, even in the face of declining output, suggests that broader disinflation will take longer to materialise—if it does through current policy pathways.

Adding to the complexity is that this data likely diminishes the odds of multiple base-rate reductions in the near term. Core data like this changes how we assign probability weight across the forward curve, and the near end should not be priced for easing unless we begin to see clear improvement on the productivity side. At this point, nothing in these revisions suggests producers can count on cost relief from labour in the short term.

Rates volatility, particularly around intermediate maturities, could therefore remain underpinned. Pricing behaviour has already reflected some pushback on aggressive dovish assumptions, and this kind of data keeps that trend alive. It might prompt reconsideration of certain convexity-sensitive positioning, especially where carry arguments had previously relied on the assumption of cyclical softening.

What’s more, higher unit labour costs with falling output could raise questions about balance sheet health in sectors where labour intensity is high and margins are already tight. As a result, volatility in single-name credit could see a relative uptick, particularly if the macro path forward remains unclear.

Overall, the numbers speak to a familiar theme: inflation won’t ease just because headline numbers weaken. As long as the cost of producing goods and services keeps climbing while output per worker shrinks, those banking on a soft disinflation narrative may be setting themselves up for mispricing the near-term path for policy and risk premia. We should be preparing for pricing asymmetries to continue into the summer.

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