The probability of high wage pressure increases in Q2

Summary

As measured by the Employment Cost Index (ECI), the sequential increase in compensation in private industries slowed to 0.8% in Q2, dragged down by slower benefits growth. The moderation came as a bit of a surprise given the plethora of survey evidence suggesting that firms have been raising compensation to bring in new workers. That said, wages & salaries were a bit stronger than the headline number. The 1.0% increase in the second quarter puts wages & salaries up 3.6% versus a year ago, more in line with the strong wage increases shown in the monthly employment reports.

Looking forward, our model to predict wage growth in the coming quarters suggests the probability of high wage pressure increased in Q2 to 43% from 38% in Q1, notching its 16th consecutive quarter above the 25% threshold. Higher wage growth could provide a more persistent boost to inflation, beyond the supply-related drivers detailed in our The Chains That Bind series, as employers pass on their higher labor costs to consumers. To what extent wage growth feeds through to broader inflation, however, will depend on productivity and pricing power.

Source: Wells Fargo Securites

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