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Friday, January 29, 2016

Wage Inflation Likely Building, Employment Cost Index Rises

Wage inflation is very likely building based on the employment cost index which in the fourth quarter rose an outsized 0.6 percent for a second quarter in a row. Benefits rose 0.7 percent in the quarter which is a sizable increase for this component. The wages & salaries component also shows substantial pressure, up 0.6 on the quarter and reflecting strength in year-end bonuses.

Year-on-year, however, rates in this report have yet to build steam, at 2.0 percent for the second quarter in a row and down from 2.2 percent this time last year. Benefits are up only 1.7 percent on the year with wages & salaries up 2.1 percent.

For the hawks, who are always on the watch to head off inflationary flashpoints, this report is meaningful and will offer debate points for further rate hikes. For Fed policy in general, this report is positive and supports expectations that wage inflation will help offset continued commodity deflation.


Recent History Of This Indicator:
The impact of the employment cost index cannot be exaggerated with its results helping to shape inflation expectations among policy makers. Upward trends in this report are expected to be underscored by the fourth-quarter report where forecasters see a second straight outsized quarterly gain of 0.6 percent, one that would likely raise long-awaited talk of wage inflation.

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