US: ECI is goods new for the FOMC but more will be needed – Wells Fargo

The Employment Cost Index (ECI) report released on Tuesday had an unusual impact across financial markets, with the US Dollar weakening after the numbers. Analysts at Well Fargo point out that the figures are one more in the list of inflation readings over which the Federal Reserve is breathing a little easier. They point out that while the report further supports inflation moving back toward the 2% target, labor cost growth remains too strong to be consistent with it staying there for the long haul. They think more slowing will be needed before the FOMC feels comfortable declaring victory on inflation.

ECI slowed for a third consecutive quarter

“The ECI report offers the FOMC one of its cleanest looks at how a tight labor market is translating into elevated wage pressures. Before the pandemic, employment cost growth was running at just shy of a 3% pace alongside core PCE inflation that was similarly just below 2%. The 5.1% increase in the ECI over the past year and 4.0% annualized increase in Q4 suggest that labor costs are still growing about a percentage point above what would be consistent with the FOMC's 2% inflation target given trend-like productivity growth.”

“But when it comes to inflation, easing labor cost growth should not be conflated with benign labor cost growth. The labor market remains incredibly tight. Plenty of household-name companies have announced layoffs over the past few months, but initial jobless claims continue to hover near record lows, and more independent businesses report having a hard time to filling jobs than at any point before COVID. Therefore, while the deceleration in labor costs is a welcome development from the Fed's perspective and further sign that inflation is headed back toward 2%, it is too soon to declare that it will stay there for the long-haul.”