Employment Cost Index Surpasses Forecasts, Fuels Inflation Concerns

Highlights

• ECI rises 1.1%, beating forecasts
• Year-over-year compensation surges 4.3%
• Bullish impact on U.S. dollar likely

Employment Cost Index: A Key Indicator of Inflationary Trends

The Employment Cost Index (ECI) for September 2023 surpassed expectations, signaling not just an uptick in labor costs but also casting a spotlight on broader economic implications. The U.S. Bureau of Labor Statistics reported a seasonally adjusted 1.1% increase in compensation costs for civilian workers for the three-month period ending in September. Within this, wages and salaries rose 1.2%, while benefit costs saw a 0.9% climb, marking a steady rise from June 2023.

Year-Over-Year Trends in Compensation Costs

The data shows an even more compelling narrative when looked at from a year-over-year perspective. Compensation costs for civilian workers have surged 4.3% for the 12 months ending September 2023. Moreover, wages and salaries specifically have gone up 4.6%, with benefit costs increasing 4.1%. When juxtaposed with last year’s increases, it’s evident that the rate of compensation growth has slightly tapered off, although it still remains significantly high.

Sector-Wise Analysis: Private Industry and Government

Diving deeper into the specific sectors, the private industry saw its compensation costs shoot up by 4.3%, with wages and salaries going up by 4.5% and benefit costs rising by 3.9%. Inflation-adjusted metrics further drive home the point, indicating a 0.6% increase in compensation costs for the private sector. On the other hand, state and local government workers experienced a 4.8% increase in their compensation costs, with wages and salaries showing a similar increase, adding to the inflationary pressures.

Occupational and Industry Variances

Among various occupational groups in the private sector, compensation costs ranged from a 3.9% increase for production, transportation, and material moving jobs, to a 4.5% rise for service occupations. Industry supersectors displayed a varied range too, with a 3.7% rise in manufacturing, and an almost 5% jump in sectors like education and health services.

Short-Term Forecast: Bullish on the U.S. Dollar

Given that an ‘Actual’ greater than ‘Forecast’ in the ECI is generally good for the U.S. dollar, the current data release paints a bullish picture for the currency.

As businesses continue to grapple with increasing labor costs, the likelihood of these costs being passed on to consumers remains high, further stoking inflationary concerns.

This environment, characterized by rising compensation and benefit costs, could potentially see another rate hike by the Federal Reserve, as they continue to balance inflation risks and labor market dynamics.