Propelled higher by solid gains in wages & salaries and benefit costs, the Employment Cost Index (ECI) increased a stronger-than-expected 0.7 percent in the second quarter. The Fed will notice this pickup.
Wages & Benefit Costs Jump
Following a soft Q1 performance, total employment costs accelerated in Q2, rising at the fastest quarterly pace since Q3 2008. Year over year, ECI rose at a 2.0 percent pace, consistent with the run-rate over the past four years. Private wages & salaries quadrupled the gain in Q1, rising 0.8 percent on the quarter. Benefit costs jumped 1.0 percent, bringing the year-over-year rate to 2.5 percent, its highest pace since Q1 2012.
An Inflection Point?
The U.S. labor market has improved in the first half of the year with a stronger pace of hiring and an unemployment rate moving closer to full employment. Despite this improvement, the Fed continues to highlight wage inflation’s below-trend performance as evidence that labor market slack is still plentiful. While not currently problematic, Q2’s ECI performance will require the Fed to reassess its labor market and inflation assessment.