Tame labor costs put inflation concerns on furlough

INDICATOR: Third Quarter Employment Costs

KEY DATA: ECI: +0.4%; Year-over-Year: +1.9%; Wages and Salaries: 0.3%; Year-over-Year: 1.6% 

IN A NUTSHELL: “With labor costs tame, the Fed will likely not have to worry about inflation for quite a while.”

WHAT IT MEANS: With worker compensation comprising about seventy percent of business costs, as goes labor costs so goes business costs and ultimately inflation. Well, there is very little happening on the worker compensation front. In the third quarter, the Bureau of Labor Statistics’ Employment Cost Index rose minimally with wages and salaries hardly budging. The details of the report were just as good as the headline. Looking across industries, except for some professional workers and those in insurance companies, wages were up modestly. Public school workers saw almost no change in their wages. Nonunion workers did a little better than union workers while public and private workers saw their compensation increase the same amount. Benefits costs did accelerate but the year-over-year growth rate was stable. Benefits in the private sector increased faster than for state and local government workers.

MARKETS AND FED POLICY IMPLICATIONS: Some Senators who are deciding on Janet Yellen’s nomination, as well as some Fed members, are worried about future inflation. It will be hard for inflation to accelerate sharply as long as worker compensation remains as well under control as it is right now. Of course, as I have argued ad nauseam, the sluggish pace of wage gains will also limits consumer spending and therefore economic growth. In other words, low compensation begets slow growth and the two together imply limited inflation. The incoming Fed Chair is on solid ground when she argues that economic growth not inflation is the primary concern for monetary policy. As for the markets, it’s fun to set records so why not just keep it up? The Fed is not going anywhere so why should investors? Good question.

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