The Employment Cost Index (ECI) matched expectations and increased by 0.6% in the first quarter, following a similar 0.5% rise in the previous quarter. The ECI is now 1.9% higher than a year ago, which is the slowest pace of growth since first quarter 2014. Total wages and salaries rose by 0.7% and benefits by 0.5%. For the private sector, total wages and salaries are now 2.0% higher, while benefits are just 1.2%.
As the debate continues over just how much slack there currently is in the labour market and, therefore, just how much room there is for the Fed to continue with its current stance on monetary policy, the answer will ultimately be found in the wage inflation data. If the labour market truly is tight and those workers who dropped out of the labour-force really are not planning to return, this suggests that the pool of available workers who could potentially ease any capacity constraints is much smaller; therefore, labour costs should rise. Conversely, if many workers are ready, willing, and able to rejoin the labour-force, but are waiting for a stronger recovery to take place to draw them back in, then labour costs should remain muted for an extended period. With the unemployment rate around 5%, the Fed had felt it was confident enough in December to increase interest rates. Since then, it believes that international factors have been holding it back from further increases. However, today’s report for the first quarter suggests that compensation costs are still not exerting much upward pressure on inflation, implying more room to maintain lower-for-longer interest rates. As it stands today, the ECI (which adjusts for inter-industry shifts in employment) is probably the best measure to look at, as opposed to average hourly earnings, which do not make such adjustments. The pace of ECI gains (as depicted in chart 1) still looks very low. In terms of industries, those with the largest gains in the quarter were for retail trade workers and transportation and aircraft manufacturing. Bottom line, wage inflation is still showing very little momentum, even though the labour market has tightened further. The recent rise in the participation rate, if it continues, would suggests that the pool of available workers is starting to increase again as workers return to the labour-force because they are buoyed by the better job prospects. Certainly this report does not suggest the Fed needs to rush to raise rates again soon.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.