Q4 ECI: Further good news for inflation's descent
|Summary
Add the Employment Cost Index to the list of inflation readings over which he Fed is breathing a little easier. The ECI slowed for a third consecutive quarter, rising 1.0% in Q4. Still, employment costs are rising at a 4.0% annualized pace in what remains a tight labor market. While this report further supports inflation moving back toward 2%, labor cost growth remains too strong to be consistent with it staying there for the long-haul. We think more slowing will be needed before the FOMC feels comfortable declaring victory on inflation.
Gradual cooling in labor cost growth continues
Inflation pressures emanating from the labor market are cooling. The Employment Cost Index, the broadest measure of labor costs, rose 1.0% (not annualized) over the fourth quarter. The increase was a bit softer than the consensus expectation of 1.1% and marks the third straight quarter in which total employment cost growth slowed. Although up 5.1% on a year-over-year basis, the quarter's gain translates to a more modest annualized pace of 4.0% (chart). The softening is consistent with other recent wage data, such as average hourly earnings and the median rate of wage growth, that labor cost growth has likely peaked and a dreaded wage-price spiral has been avoided.
Employment costs for private sector workers and state and local government employees both increased by 1.0% in Q4. By sector, leisure and hospitality wage growth cooled, from 1.8% in Q3 to 0.9% in Q4, though over the 12 months ending in December the increase was a sizable 6.4% (chart). Labor cost pressures remained firm in the health care and social assistance sector (+1.3%), and the information sector also showed few signs of decelerating wages despite the ongoing challenges in the technology industry (+1.3%). Compensation growth was flat at 0.9% for the cyclically-sensitive goods-producing categories of manufacturing and construction.
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