US: Employment Cost Index

Fri Apr 27 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous
ECI - Q/Q change 0.7% 0.6% to 0.8% 0.8% 0.6%
ECI - Y/Y change 2.7% 2.6%

The isolated hints of emerging price pressures now include employer costs. The employment cost index rose 0.8 percent in the first quarter which is the high end of expectations. The year-on-year rate is up 1 tenth to 2.7 percent for the highest reading of the last 10 years.

Wages & salaries, not benefits, are the leading source of pressure, up 0.9 percent in the quarter for an annual 2.7 percent increase. But benefits are also up, climbing 0.7 percent for 2.6 percent year-on-year.

This report is a red flag for next week's FOMC meeting and will certainly be cited, along perhaps with recent acceleration in average hourly warnings, as an indication of tightness in the labor market, conditions that point to the risk of wage-push inflation.

Market Consensus Before Announcement
Modest acceleration is expected for the employment cost index which is expected to rise 0.7 percent in the fourth quarter compared to 0.6 percent in the third quarter. This report has been at expansion highs with wages and benefits both showing similar gains.

A measure of total employee compensation costs, including wages and salaries as well as benefits. The employment cost index (ECI) is the broadest measure of labor costs.

The employment cost index is an easy way to evaluate wage trends and the risk of wage inflation. Wage inflation is high on the Federal Reserve's enemy list. Fed officials are always on the lookout for the prospects of inflationary pressures. Wage pressures tend to percolate when economic activity is booming and the demand for labor is rising rapidly. During economic downturns, wage pressures tend to be subdued because labor demand is down.

By tracking labor costs, investors can gain a sense of whether businesses will feel the need to raise prices. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked the employment cost index and adjusted their portfolios to anticipate these events.