Was The Employment Cost Index The Elephant in the Room?

Some have voiced concerns over the jump in employment costs lately.

The most recent reading showed up as an increase of .7%, coming in right at the Fed’s target of 2% for the past four quarters.  It was the strongest quarter figure seen since 2011 and has some worried the Fed is going to react quicker to hike monetary policy. The key number was a rise in wages and benefits, representing .6% of the jump. 

Big Picture

Let’s remember the Fed has been wanting to see some inflation but not to the extent that it is coming from a tight labor market. Fed Chair Yellen understands the structural issues with unemployment and that far fewer are participating in the labor force, so the pool of available workers is still quite large —U6 is still above 12%.  U6 includes the official unemployment rate, discouraged workers, marginally attached workers and part-timers who are there because of economic reasons.  The true unemployment number.

What it Means

Fiscal policy has been impotent to help create new jobs, and monetary policy can only go so far.  The hope is more workers come off the sidelines by seeing job offerings, higher wages and benefits to get off the government rolls.  Until that slack is removed (unless it is permanent that is another issue) then we won’t see major inflationary pressure from wages. A continued decline in jobless claims tells us more unemployed may be coming back into the labor pool — it’s slow but trending in the right direction.

I, for one, see this as a good step toward improving the economy and lessening the impact of the Fed.
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