Two key US inflation indicators reported larger-than-expected increases on Friday, fueling fears that prices will remain elevated and trigger more aggressive rate hikes by the Federal Reserve.
The Labor Department’s employment cost index, a broad measure of wages and benefits, rose 1.3% in the second quarter from the previous three months, compared with a median estimate of 1.2% by economists.
Separately, the Commerce Department’s personal consumption spending index, which forms the basis for the Fed’s inflation target, rose 1% on a monthly basis in June, the fastest since 2005.
Employers with near-record job vacancies are trying to attract and retain workers with higher wages and other perks, while consumers in general, and food and fuel costs in particular, are under pressure.
“Wage increases and labor costs are still showing strong upward pressure, and that will likely push the Fed to hike rates in the next few meetings,” said Alan Detmeister, an economist at UBS who was a former central bank researcher. The labor cost number, he said, “was hot”.
Fed officials have carried out the steepest rate hikes in decades and signaled their top priority is reducing high inflation, despite speculation mounting in financial markets this week that a slowing economy will force the central bank to raise borrowing costs early next year to lower.
Two-year Treasury yields rose after the data and US stocks also rose on Friday. Federal funds futures markets showed that traders increased their bets on a 75 basis point hike in September, despite continuing to bet that a 50 basis point hike was the most likely outcome.
Fed Chair Jerome Powell has often cited the ECI as a key gauge of tightening jobs. In a news conference on Wednesday following the central bank’s decision to raise interest rates by another 75 basis points, he said the index is “very important because it adjusts the composition” of employment.
Contrary to earnings measurements in the Monthly Jobs Report – which is expected next week to show that average hourly wages moderated in July – the ECI is not skewed by employment shifts between occupations or sectors. Compared to the previous year, the labor cost measure increased by 5.1%, a new data record from the early 2000s.
Although wages are rising rapidly, they still aren’t keeping pace with inflation, forcing many Americans to make difficult financial decisions. Recent comments from companies like Walmart Inc. and Best Buy Co. show that consumers are spending a large portion of their budget on essentials, leaving little for other purchases.
Inflation-adjusted spending barely rose in June after falling the previous month, Commerce Department data show. As higher prices put more strain on consumers’ budgets, savings dwindle. According to the report, the savings rate fell to 5.1%, the lowest level since 2009.
Wages for civilian workers rose 5.3% from a year earlier, a record. Benefits increased by 4.8%. Excluding the government, private wages rose 5.7% year-on-year.
While the monthly jobs report’s hourly pay figures show smaller annual increases, the Atlanta Fed’s wage growth tracker rose 6.7% year over year in June — the strongest data dating back to 1997.
Powell also said the ECI has not yet reflected the same slowdown in wage growth.
Friday’s report shows that compensation gains were broad-based in the most recent quarter, with sales, finance and retail being among the biggest gains.
However, there are signs that the labor market is weakening. Companies like Rivian Automotive Inc. and Spotify Technology SA have either laid off workers or announced they will slow hiring, citing economic uncertainty.
Jobless claims have generally risen and as the Fed continues to hike rates it will likely dampen demand for labour.
Powell said the job market is still “extremely tight” right now, and that could fuel wage growth. The number of vacancies has eased somewhat, but is still close to the record.
Many companies are still struggling to find qualified workers, but some are making progress.
“We absolutely saw work-related headwinds in the first half, but as we noted in our comments, we’re seeing that relief in the second part of the second quarter and even the results we’re seeing so far in July,” Das said Kathy Warden, CEO of Northrop Grumman Corp. on a conference call this week.
But the economy is losing momentum, highlighted by a report on Thursday that showed a second straight decline in gross domestic product. This is likely to keep future wage increases in check.
If the economy slows down drastically, it could lead to more moderate price increases going forward. Big retailers, including Target, have already said they overstock as consumers pull back, while Walmart has found consumers are buying fewer goods overall as they pay more for groceries and their budgets are tight.
But when it comes to consumption, the signals are not all pointing in the same direction. For example, used cars, which were a big driver of inflation over the past year, are back on sale and showing price declines over time – which could help lower inflation in the coming months.
“In our divided economy, used car buyers are more likely to be adversely affected by higher energy, food and rent prices,” Jonathan Smoke, chief economist at Cox Automotive, wrote in a research note this week.
However, new cars remain scarce and sold at higher prices, which could continue to exert some upward pressure on inflation.
“We continue to see new vehicle price inflation, capped discounts and record-low incentives,” Smoke wrote.
Information for this article was provided by Molly Smith of Bloomberg News (TNS) and Jeanna Smialek of The New York Times.
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